Calculating unit cost

Question 1

What is a standard cost card?

Answer 1

Shows the expected input resources usage and costs per cost unit.

Question 2

What is Absorption costing?

Answer 2

Absorption cost includes a ‘fair’ share of fixed production overheads in inventory valuation.

Question 3

What are the 3 steps in calculating Overhead absorption?

Answer 3

1. Overhead allocation or apportionment.
2. Overhead reapportionment.
3. Overhead absorption (OAR).

Question 4

What determines whether overheads are allocated or apportioned?

Answer 4

Overheads which only arise in a department are allocated in total to that cost center.
Overheads that are factory wide are apportioned (shared) between cost centers on a fair basis.

Question 5

Give me the definition and formula for Overhead Absorption Rate (OAR)

Answer 5

Each production department’s total overheads are absorbed into cost units on an appropriate basis for that department.

OAR = Budgeted overhead cost / Budgeted measure of activity

Question 6

What are some measures of activity?

Answer 6

Prime cost, direct labor hours, labor hours or machine hours.

Question 7

How do you calculate under / (over) absorbed overheads?

Answer 7

Actual overhead incurred - Overhead absorbed (actual activity x OAR)

Question 8

When can ONLY fixed overheads be under or over absorbed?

Answer 8

When expenditure are as budgeted, but actual and budgeted production activity levels are different.

Question 9

How would you calculate under or over absorbed overheads when expenditure is as budgeted but actual and budgeted production activity levels are different?

Answer 9

Under / (over) absorbed overheads = actual labor hours exceeded (difference) x fixed overhead per direct labor hour.