Topic 2 - Absorption costing

Question 1

Cost units

Answer 1

Products that absorb overheads as they pass through cost centres

Question 2

Cost centres

Answer 2

Areas of a business that generate indirect costs

Question 3

What are the steps of absorption costing

Answer 3

1. Allocate - Some production overhead costs can be allocated to cost centres
2. Apportion - What is left must be apportioned on an equal basis
3. Re-Apportion - Service cost centre overheads must be reapportioned to the production cost centres on some equitable basis
4. Absorb - Finally, the production cost centre overheads must be absorbed by individual cost units on an appropriate basis

Question 4

Structure of Absorption costing table

Answer 4

Overhead
Basis
Total cost
Production cost centres
Service cost centres

Question 5

What is the formula of Overhead Absorption Rate

Answer 5

Total budgeted overhead (£)/Total budgeted activity (hours)

Question 6

Full cost calculation

Answer 6

Direct costs
+ Indirect costs
= Full cost

Question 7

Reciprocal services

Answer 7

If both services provide reciprocal services to each other, start with the one with the larger overhead

Question 8

Absorption costing

Answer 8

Focuses on overheads and full cost recovery through the apportionment of overheads to production cost centres on some equitable basis and the calculation of overhead absorption rates for cost units

Question 9

Advantages

Answer 9

Allows an accurate full cost per cost unit to be identified
Important for setting prices to achieve profit mark up%
Working out accurate profit margin% where prices are set by the market and competitors

Question 10

Disadvantages

Answer 10

Allocation, apportionment and reapportionment of overheads is all estimated on some some equitable basis
May need to adjust at the end of the financial period for over or under absorption of overheads if actual output levels differ from those budgeted