Accounting 5 - Overheads Distribution (Absorption + ABC)

Question 1

Absorption costing - 2 steps in the process?

Answer 1

1 - Overheads charged to the departments that use them

2 - Departments then charge the overheads to the products they work on

Question 2

If a department is not a production department, how must it charge its overheads?

Answer 2

To the production departments that use it

e.g. a canteen recharges its overheads to Production Unit A and B as the workers use the canteen

Question 3

Overhead absorption rate formula in absorption costing?

Answer 3

Budgeted expenditure / budgeted activity

Question 4

Problems with absorption costing?

Answer 4

Developed when:

• overheads were only a small fraction of total cost
• most organisations produced a narrow range of products

Very rough approximation of charging overheads to cost units (or products)