Absorption Costing

Created by: Oly
Created on: 04-03-22 17:38

What is absorption costing?

All direct and indirect costs are treated as product costs

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What is the difference between overhead allocation and overhead apportionment?

Overhead allocation is used when the whole expense is directly related to one
department

Overhead apportionment is used when the overhead is related to more than one
department

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Define production department

production department is one which is directly involved in manufacturing the
products

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Define service department

service department is one which is not directly involved in manufacturing the
products but provides support to other departments

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Why is Service Departments Overheads re-apportioned to
Production departments?

Service department incur overhead costs and these costs are charged to the product by
transferring to the production department on an appropriate basis and to ensure that all costs are recovered in the sale of products.

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Why overheads may be over absorbed in a business?

More units were produced than forecast
Actual overheads were less than forecast

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Why overheads may be under absorbed in a business?

actual overheads exceed forecast overheads actual production is less than forecast production
calculation error

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Why profit calculated using absorption costing would be different to profit calculated
using marginal costing?

Using absorption costing
Closing inventory is valued at full production cost and so shows a higher closing inventory value.
Fixed overheads are treated as part of production costs and are carried forward as part of the inventory value.
Using marginal co

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Why does a business calculates separate overhead absorption rates for each production
department rather than a single rate for the whole factory?

The overhead absorption rate should be chosen to reflect the activity of that department
If the department is machine-intensive then machine hours should be chosen
If the department is labour intensive then labour hours should be chosen
This should lead

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Other cards in this set

Card 2

Front

What is the difference between overhead allocation and overhead apportionment?

Back

Overhead allocation is used when the whole expense is directly related to one
department

Overhead apportionment is used when the overhead is related to more than one
department

Card 3

Front

Define production department

Back

Card 4

Front

Define service department

Back

Card 5

Front

Why is Service Departments Overheads re-apportioned to
Production departments?

Back

View more cards

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Absorption Costing