Lecture 2

Question 1

What is the equation for Total product cost?

Answer 1

Total product cost = Prime cost + Production overhead cost.

Question 2

Average Cost Method (AVCO) equation?

Answer 2

Average Cost Method (AVCO) equation: AVCO = Total amount paid/Units received x units issued for production

Question 3

Define allocate?

Answer 3

Allocate means to assign a whole item of cost, or of revenue, to a single cost unit, centre, account or time period.

Question 4

Define Apportion?

Answer 4

Apportion means to spread costs over two or more cost units, centres, accounts or time periods. (It is referred to by some books as ‘indirect allocation’.)

Question 5

Define absorb?

Answer 5

Absorb means to attach overhead costs to products or services.

Question 6

Explain the five steps of Allocation, Apportionment and Absorption in Costing?

Answer 6

This process can be explained in the following steps:

Direct materials are allocated to products
Direct labour costs are allocated to products

Indirect material costs and indirect labour costs are:

allocated and apportioned to cost centres (many firms have two main types of cost centre – production cost and service cost centres)
Total indirect costs of service cost centres are:

apportioned over production cost centres
Total overhead costs of production cost centres are
absorbed into products

Question 7

When a question says “using labour hours as allocation basis” what do you know you need to do?

Answer 7

when a question says “using labour hours as allocation basis” what do you know you need to use a blanket rate