Absorption and activity based costing flashcards

Topic 12: Absorption and activity based costing

Allocation, apportionment and absorption

Allocation: charging a whole cost to the one product or cost centre that caused it. Apportionment: sharing an indirect cost between cost centres on a fair basis. Absorption: charging cost-centre overheads to products using an OAR.

Rent of £48,000 shared by floor area: X 600 m², Y 1,000 m², Z 400 m²

X £14,400; Y £24,000; Z £9,600. Check: total £48,000.

Budget: overheads £54,000, 4,500 direct labour hours. Actual: 4,300 hours, overheads £53,100. Result?

OAR £12 per hour. Absorbed £51,600. Under-absorbed by £1,500, which reduces profit.

OAR £7.00 per machine hour. Actual 13,000 machine hours; actual overheads £89,900. Result?

Absorbed £91,000. Over-absorbed by £1,100; profit rises by £1,100.

A unit uses £22 materials, £18 labour and 1.5 machine hours at £7.00. Total cost and price at a 30% mark-up?

Cost 22 + 18 + 10.50 = £50.50. Price 50.50 × 1.3 = £65.65.

Total cost £64. Price for a 20% margin on selling price?

Price = cost ÷ (1 − margin) = 64 ÷ 0.8 = £80.

A deliveries pool of £18,000 has 600 deliveries. Cakes use 420 deliveries for 9,000 cakes. Cost per cake?

Driver rate £30 per delivery. 420 × 30 = £12,600. ÷ 9,000 = £1.40 per cake.

When does ABC give very different product costs from absorption costing?

When products differ a lot in batch size, overheads are a large share of cost, or a low-volume complex product shares a factory with a high-volume simple one. Volume-based rates under-cost the low-volume product.

Production 6,000 units, sales 5,200, no opening inventory, fixed production overhead £5 per unit. Absorption vs marginal profit?

Inventory rises by 800 units, so absorption profit is 800 × £5 = £4,000 higher.

ABC cost £42, absorption cost £32. The product is priced at a 25% mark-up on absorption cost. Result against ABC cost?

Price 32 × 1.25 = £40. Against ABC cost of £42, a loss of £2 per unit.

Apportionment bases for rent, machinery insurance, machine power and canteen costs

Rent: floor area. Machinery insurance and depreciation: machinery cost or value. Machine power: machine hours. Canteen and welfare: number of employees.