Week 20 - Absorption Costing IMPORTANT Flashcards
Total absorption costing
All direct and indirect (overhead) costs are allocated to a cost unit
How does absorption costing assist decision making?
3
Provides information for making economic decisions I.w. Profitability
Justify costs
Measuring income for external parties
How to absorb costs into a product
+ formula
Fixed Overhead Absorption Rate (FOAR) = budgeted overhead/Budgeted absorption rate (Units etc.)
Using FOAR for Blanket Absorption
Overheads are £250k
9000 hours worked total
250k/9000 = £27.78 per labour hour
Then have to calculate the overhead to be absorbed by each product
Say product X took 2 hours
Y took 2.5 hours
Z took 4 hours
X: 2x £27.78
Y: 2.5 x £27.78
Z: 4 x £27.78
Using FOAR for departmental absorption costing
Calculate the FOAR for each department e.g. £20 per labour hour in Assembly, £37.50 in Finishing
Then calculate overhead to be absorbed by each product
E.g. if one product took 2 assembly hour and 1 finishing hour, total overhead to be absorbed for that product is:
(£20 x 2) + (£37.50 x 1) = £77.50
Over-under absorption and what each means for profit
Difference between budgeted absorption and actual absorption
Under absorption: costs increase ~> profit decreases
Over absorption: costs decrease ~> profit increases
Adjusting for under-over absorption
Calculated budgeted absorption rate using FOAR
Calculate overhead absorbed by actual activity using FOAR
Find difference and see whether over or under absorbed
Absorption Costing Profit Statement IMPORTANT
Sales - Multiply sales volume by price per unit
Opening stock
Production costs (treat the same as purchases in CoGS calc)
Closing stock
Calculate CoGS
Over/under absorption
Adjusted cost of goods sold (CoGS add/less over/under absorption amount)
Gross Margin
Other expenses
Profit
Overhead Analysis Sheet
Create a table with columns being:
- Cost (include all indirect costs)
- Base (what you have decided to base the cost on e.g. the rent cost you might attribute to the Square Meterage number you’re given)
- the different departments
Total
Once you’ve created that you then need to do your absorption costing. It will say: 40% of this departments time is spent on this department so allocate the cost accordingly to get a FINAL COST FIGURE FOR EACH DEPARTMENT.
This is done through another table with column titled:
Indirect costs from above
Absorption from XYZ department
Total