Chapter 6.3 Absorption Costing

Question 1

What are the differences between absorption costing and marginal costing?

Answer 1

Absorption costing: allocates both fixed and variable costs to products.
Marginal costing: emphasizes variable costs, which assists in short-term decision-making.

Question 2

What is absorption costing also known as?

Answer 2

Full costing

Question 3

What costs are included in absorption costing?

Answer 3

Both variable and fixed manufacturing overhead costs

Question 4

How does absorption costing affect the budget?

Answer 4

It reflects fixed costs as part of the total cost for each unit

Question 5

What is the impact of absorption costing on product pricing decisions?

Answer 5

Organizations must factor in all costs, including fixed overheads, to ensure profitability

Question 6

In absorption costing, what does the gross margin represent?

Answer 6

The difference between sales revenue and the total cost of sales

Question 7

What is crucial for avoiding losses in absorption costing?

Answer 7

Accurate cost estimations

Question 8

How does absorption costing affect inventory valuation?

Answer 8

It assigns fixed overhead costs to inventory, affecting its valuation

Question 9

What does variance analysis help organizations identify in absorption costing?

Answer 9

Over- or under-absorption of fixed costs due to changes in production levels

Question 10

How does absorption costing add complexity to cost control?

Answer 10

It adds complexity due to the inclusion of fixed costs

Question 11

What are the components of production costs in absorption costing?

Answer 11

• Materials
• Labor
• Overheads

Question 12

Fill in the blank: The formula for calculating the finished goods cost under absorption costing is: total direct materials cost + total direct labour cost + total production overhead costs = _______.

Answer 12

Production costs for units sold

Question 13

How does absorption costing influence production planning?

Answer 13

Organizations may aim to produce enough to cover their fixed overhead costs

Question 14

What is the relationship between absorption costing and budgeted gross margin calculation?

Answer 14

The gross margin impacts the organization’s overall profitability

Question 15

What is 1 formula for calculating the closing inventory of finished goods using absorption costing?

Answer 15

Opening inventory of finished goods
+ production overhead costs
- Cost of sales

Question 16

What is the second formula for determining closing inventory?

Answer 16

1. Calculate total cost of production
2. Calculate cost per unit produced (total cost of production ÷ total nr of units produced)
3. Calculate cost of sales (nr of units sold X cost per unit produced)
4. Calculate closing inventory (number of closing inventory units X cost per unit produced)

Question 17

What costs are treated as period costs in absorption costing?

Answer 17

Non-manufacturing costs