unit 17: absorption costing

Question 1

define absorption costing (full costing)

Answer 1

costing system used in valuing inventory. not only includes cost of materials and labor but also has both variable and fixed manufacturing overhead costs.

Question 2

define direct, indirect, variable and fixed costs

Answer 2

direct costs- costs directly related to the production of a product
indirect costs- costs not directly related to the production process of a product

variable costs- costs which change with different levels of output of production
fixed costs- costs that stay the same, irrespective of the level of output of production

Question 3

define absorption rates

Answer 3

predetermined rate at which overheads are charged to cost objects.

Question 4

define under and over-absorption

Answer 4

underabsorption- when applied manufacturing overheads are more than actual manufacturing overheads, difference is referred to as over-applied manufacturing overheads
overabsorption- when aplied manufacturing overheads are less than actual manufacturing overheads, difference is referred to as under-applied manufacturing overheads

Question 5

list causes of over and under absorption of overheads

Answer 5

• incorrect predetermined overhead rates
  -actual overheads being more or less than budgeted
• activity higher or lower than normal in the base use of allocation