Module 10 Absorption Costing Flashcards
Absorption Costing
- alternative method to marginal costing to calculate the profit for the year
- preferred by financial accountants and required by IAS 2
- values stock at total production cost including variable production costs and a share of fixed production costs.
overhead absorption rate
OAR = Fixed production overheads / Basis of Absorption
popular absorption bases
- Rate per unit of output
- Rate per direct labour hour
- Percentage of direct labour cost
- Percentage of direct material cost
- Percentage of prime cost
- Rate per machine hour
Pre-determined OAR
Pre-determined OAR = budgeted overheads / budgeted basis
- only fixed production overheads that are absorbed
- Non-production costs are never included
Period-end OAR
Period-end OAR = actual fixed production overheads / budgeted basis
Actual OAR
Actual OAR = actual fixed production overheads/actual basis
Cost of sales
Cost of sales = (OAR + variable production costs per unit) x units sold
Closing stock calculation
(Opening stock + Actual production - Actual sales) x (variable production cost per unit + OAR)
Difference in profit between Absorption and marginal costing
stock movement x OAR
Stock stable
opening stock is the same as closing stock
Stock rising
If stock is rising, profit under absorption costing is higher
6666yy7Stock Falling
If stock is falling, profit under absorption costing is lower
