Absorption and activity based costing (A Level) flashcards

Topic 12: Absorption and activity based costing

Allocation vs apportionment vs attribution

Allocation: a cost goes in full to the one product or department it belongs to. Apportionment: a shared overhead is divided between departments. Attribution: a cost pool is charged to products by their use of its driver.

Building insurance of $27,000 is shared between A (900 m²), B (600 m²) and C (300 m²)

A $13,500; B $9,000; C $4,500 (total $27,000).

Budget: overheads $61,200, 6,800 machine hours. Actual: 6,650 hours, overheads $58,900. Result?

OAR $9.00. Absorbed $59,850. Over-absorbed by $950, added to profit.

OAR $22.00 per labour hour. Actual 5,550 hours; actual overheads $120,600. Result?

Absorbed $122,100. Over-absorbed by $1,500, so profit is increased by $1,500.

A unit uses $30.00 of materials and 2.5 labour hours at $14 an hour, with OAR $22. Total cost and price at a 25% margin?

30.00 + 35.00 + 55.00 = $120.00. Price 120.00 ÷ 0.75 = $160.00.

A set-up pool of $42,000 has 140 set-ups. A product uses 35 set-ups for 7,000 bags. Cost per bag?

Driver rate $300 per set-up. 35 × 300 = $10,500. ÷ 7,000 = $1.50 per bag.

An inspection pool costs $63,000 for 420 inspections. Product R uses 84 inspections for 2,100 units. Cost per unit?

$150 per inspection; 84 × 150 = $12,600; ÷ 2,100 = $6.00 per unit.

Inventory rises from 700 to 1,100 units; fixed production overhead absorbed at $4.50 a unit. Absorption vs marginal profit?

Absorption profit is 400 × $4.50 = $1,800 higher.

Absorption profit $64,300. Inventory fell by 900 units; fixed production overhead $3.00 a unit. Marginal profit?

Inventory fell, so marginal profit is higher: 64,300 + 2,700 = $67,000.

Two limitations of ABC

Costly to set up and run; still relies on judgement; facility costs such as rent lack a driver; little gain when products are similar.