Absorption Costing Flashcards
What are cost cenres?
Parts of a business for which costs can be calculated e.g. departments
What are cost units?
Cost units are individual items of output for which costs can be calculated e.g. goods
What is marginal costing?
It is the cost of producing one extra unit of output
Does marginal costing include fixed costs?
No, only variable costs?
What does absorption costing mean?
It means that the total costs of the business are charged to cost units. e.g. £30 total costs added to each unit produced
Absorption cost of producing one unit =
Number of units
How to allocate direct costs?
Direct costs can be identified directly with each unit of output so is very easy to allocate to cost centres
How to allocate overheads?
They do not relate to a specific unit of output, so much be shared between cost centres and apportioned to cost units
What does allocation mean?
It means that costs are entirely charged to a specific cost centre
What does apportionment mean?
It means that overheads are shared between relevant cost centres
What are service departments?
Cost centres that provide support for other cost centres within the same organisation, but not for customers of business.
What needs to happen regarding the overheads of service departments?
They need to be eliminated from service departments and reapportioned to production departments.
