Week 20 - Absorption Costing IMPORTANT

Question 1

Total absorption costing

Answer 1

All direct and indirect (overhead) costs are allocated to a cost unit

Question 2

How does absorption costing assist decision making?
3

Answer 2

Provides information for making economic decisions I.w. Profitability

Justify costs

Measuring income for external parties

Question 3

How to absorb costs into a product
+ formula

Answer 3

Fixed Overhead Absorption Rate (FOAR) = budgeted overhead/Budgeted absorption rate (Units etc.)

Question 4

Using FOAR for Blanket Absorption

Answer 4

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

Question 5

Using FOAR for departmental absorption costing

Answer 5

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

Question 6

Over-under absorption and what each means for profit

Answer 6

Difference between budgeted absorption and actual absorption

Under absorption: costs increase ~> profit decreases

Over absorption: costs decrease ~> profit increases

Question 7

Adjusting for under-over absorption

Answer 7

Calculated budgeted absorption rate using FOAR

Calculate overhead absorbed by actual activity using FOAR

Find difference and see whether over or under absorbed

Question 8

Absorption Costing Profit Statement IMPORTANT

Answer 8

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

Question 9

Overhead Analysis Sheet

Answer 9

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