Absorption Costing
- Created by: revisingluke
- Created on: 09-10-19 08:33
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- Absorption Costing
- Steps
- (2) Apportionment between production & service centres
- (3) Apportioning service cost centres to production cost centres
- (1) Allocation of overheads incurred by cost centres
- (4) Absorption of allocated and apportioned overheads into cost of production of cost units
- Method & Layouts
- (1) Cost Statement
- Prime Cost
- Total production cost
- Total cost
- (2) Apportionment with basis
- Fl area
- No. staff
- NBV / cost of assets
- No. staff hours
- (2.1) Apportionment between service & prod cost centres
- (3) Apportionment of all service cost centres to production cost centres
- Reciprocal service depts
- Elimination method
- Apportion most providing service dept first
- More than one service dept
- Largest cost first
- Reciprocal service depts
- (4) Absorption of allocated & apportioned overheads into cost of production of cost units
- Calculate OAR
- Methods of absorption
- Direct Labour Hours
- Machine Hours
- % Direct Labour Cost
- % Direct Materials
- % Prime Cost
- Production unit
- (1) Cost Statement
- Costs
- Direct
- D Materials
- D Labour
- D Expenses
- Indirect
- I Materials
- I Labour
- Dep of factory assets
- Supervisor wages
- I Expenses
- Non-production overheads
- Selling & Distribution Cost
- Admin Costs
- Dep on non-production assets
- Other expenses
- Direct
- Under & Over Absorption
- Over Absorption
- Actual overheads < Predicted
- Activity level > predicted
- Dr Overheads A/C
- Cr IS
- Under Absorption
- Actual overheads > Predicted
- Activity level < predicted
- Dr IS
- Cr Overheads A/C
- Over Absorption
- Benefits & Drawbacks
- Benefits
- Recognises importance of including manufacturing FC in product cost determination
- Helps conform with Accrual & matching concepts
- Avoids cost separation into fixed & var elements which cannot be done easily / accurately
- Managers more responsible for costs & services provided to their centres
- Helps GP & NP calculation in IS
- Discloses inefficient / efficient utilisation of production resources by indicating under/over absorption of overheads
- Drawbacks
- Dependent on output lvl: different costs for different output. Comparison & control of cost difficult
- Not helpful in managerial decisions EG make / buy
- Many argue fixed manu, admin, sell & dist overheads produce no future benefits so not included in product cost
- Validity of product costs depends on correct apportionment of overhead costs
- Not helpful for preparation of flexible budget: no FC & VC distinction
- Benefits
- Steps
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