Absorption Costing Flashcards
What is absorption costing?
The aim is to determine the full production cost per unit
Focus on production costs only
What costs are included in production costs?
Prime costs
Indirect costs – production overheads
What costs are not included in production costs?
selling and distribution costs
What is the pro forma for absorption costing?
£ Direct materials x Direct labour x Production overhead x Full production cost x
How do you calculate production OH?
Total overhead cost/Production volume
What is OH allocation?
Indirect production costs are initially allocated to cost centres – being either production or non-production departments
This involves charging a cost in full to the source of the expenditure. e.g. canteen costs would be allocated to canteen cost centre
What is OH apportionment?
The overhead costs that have been allocated to non-production departments are now apportioned to production departments
This is the process of sharing on a fair basis e.g sharing canteen costs to production departments on the basis of the number of employees in each of those departments
What is OH absorption rate?
An absorption rate is calculated for each production department. This is the rate at which production overheads will be added to the cost of production going through the department.
Total overhead cost/Production volume
Production volume could be number of units, number of direct labour hours, number of machine hours.
What is a predetermined absorption rate?
Production overhead costs are normally absorbed at a predetermined rate based on budgeted overhead expenditure and budgeted production volume
What are under or over absorbed OH’s?
This occurs in absorption costing when the predetermined absorption rate is different from actual absorption rate
How do you calculate the amount of under/over absorbed overheads?
Production overhead absorbed X
Actual production overhead Y
Under or over absorbed overhead X-Y
What is the formate of absorption costing profit statement?
Sales x
Less Cost of sales
Opening stock x
Production costs x
x
Less Closing stock (x)
(x)
x
Production overhead absorbed x
Production overhead incurred x
Over(under) absorbed overhead x/(x)
Gross profit x
Less: Selling, distribution and admin costs
variable x
fixed x
(x)
Profit/(loss) xWhat are the advantages of absorption costing?
Fixed production costs can be a large proportion of total costs
Follows matching concept
Necessary to include fixed production overhead for inventory values for financial statements
Analysis of under/over absorbed overheads useful for identifying inefficient utilisation of resources
What are the disadvantages of absorption costing?
Apportionment and absorption of overheads is arbitrary
Profits vary with changes in production volume
