OxfordAQA A-Level Accounting: Absorption and activity based costing (9615) – Revision Notes

This page condenses the study guide; go there for full explanations and the longer worked examples.

These notes cover 3.2.2 Absorption and activity based costing of the OxfordAQA International AS and A-level Accounting (9615) specification, Version 1.2, for International AS exams May/June 2025 onwards and International A-level exams May/June 2026 onwards. The section is International A-level only and is assessed on Paper 4: Accounting for analysis and decision making. All amounts are dollars; all businesses are invented.

Links: course hub · printable checklist · practice questions · free 10-minute diagnostics · marginal costing notes

The terms the specification lists

Absorption costing

Term	What it means in one line
Allocation	A cost goes in full to the single product or department it belongs to (direct costs to products; a department’s own indirect wages to that department)
Apportionment	A shared indirect cost is divided between departments on a basis that reflects their use of it
Absorption	Each production department’s overheads are loaded onto output with an overhead absorption rate
Under-absorption	Overheads charged to output < overheads actually incurred
Over-absorption	Overheads charged to output > overheads actually incurred

Activity based costing

Term	What it means in one line
Cost pool	The overheads of one activity grouped together (changeovers, inspections, purchasing)
Cost driver	The thing whose quantity makes that pool’s cost move (number of changeovers, inspections, orders)
Attribution	Charging a pool to particular products according to how much of its driver each one uses

Formula sheet

Purpose	Formula
Apportioned share	Overhead × (department’s basis ÷ total basis)
Overhead absorption rate	Budgeted department overheads ÷ budgeted activity
Overhead in one unit	OAR × hours (or units) that unit uses in the department
Overheads absorbed in the period	OAR × actual activity
Under- or over-absorption	Overheads absorbed − actual overheads (negative = under)
Cost driver rate	Cost pool ÷ total quantity of the driver
Overheads attributed to a product	Driver rate × driver quantity that product uses
Unit total cost	Direct costs (materials, labour, expenses) + overhead per unit
Selling price, mark-up given	Cost × (1 + mark-up %)
Selling price, margin given	Cost ÷ (1 − margin %)
Absorption (or ABC) profit − marginal profit	Fixed overhead in closing inventory − fixed overhead in opening inventory

Method boxes

Absorption costing, from overheads to unit cost

1. Charge each department the overheads wholly its own (allocation).
2. Share common overheads (apportionment): floor area for rent and heating, machinery cost for depreciation, machine hours for machine power, employees for welfare.
3. Total each department; check the totals add back to the budget.
4. OAR: machine hours for a machine-led department, direct labour hours for a hand-work department.
5. Unit cost = direct costs + each department’s OAR × hours the unit spends there.

Activity based costing

1. Allocate direct materials and labour to each product.
2. Collect overheads into cost pools, each with its own driver.
3. Rate per unit of driver = pool ÷ total driver quantity (not ÷ units).
4. Attribute rate × quantity to each product; check the pools add back to total overheads.
5. Divide each product’s attributed total by its output; add to direct cost per unit.

Selling price

1. Find the total cost per unit by the method the question names.
2. Mark-up is a percentage of cost; margin is a percentage of price. Read which one you are given.

Small worked reminders

Lowthwaite Bakeware, Pressing department (absorption):

Budget: overheads 61,200; 6,800 machine hours
OAR = 61,200 ÷ 6,800 = 9.00 per machine hour
Actual: 6,650 machine hours; overheads 58,900
Absorbed = 6,650 × 9.00 = 59,850
59,850 − 58,900 = +950 → over-absorbed 950 (add to profit)

Fewer hours than budget absorbed less, but spending fell further, so the department still over-absorbed.

Strensall Pet Foods, set-up cost pool (ABC):

Pool 42,000; driver = number of set-ups; 140 set-ups in total
Driver rate = 42,000 ÷ 140 = 300 per set-up
Senior mix uses 35 set-ups → 35 × 300 = 10,500
Senior mix output 7,000 bags → 10,500 ÷ 7,000 = 1.50 per bag

Inventory and profit under the three methods

	Marginal	Absorption	ABC
Closing inventory valued at	Variable production cost	Total production cost using OARs	Total production cost using driver rates
Fixed production overheads	Charged in full in the period	Partly carried forward in inventory	Partly carried forward in inventory
Inventory rises	Lowest profit	Higher	Higher (size depends on which products are unsold)
Inventory falls	Highest profit	Lower	Lower
Inventory unchanged (same overhead per unit)	Equal	Equal	Equal

The difference between ABC and absorption profit comes from the overhead each unsold unit carries. A product that ABC loads heavily makes ABC profit higher when that product piles up in inventory.

Must-know distinctions

• Allocation vs apportionment vs attribution. Allocation needs no sharing. Apportionment shares an overhead between departments. Attribution shares a cost pool between products by driver use.
• Budgeted vs actual. Budgets set the OAR; actual hours times that OAR give overheads absorbed.
• Under vs over. Under-absorbed means products carried too little overhead, so profit is reduced. Over-absorbed means too much, so profit is increased.
• Volume-based vs activity-based. Absorption uses one rate per department tied to hours or units; ABC uses several rates, many tied to batches or orders instead of volume.
• Mark-up vs margin. The same cash profit is a bigger percentage of cost than of price.

Benefits and limitations, compressed

• Absorption. For: recovers all production costs in full-cost prices; matches fixed overhead with the inventory produced. Against: arbitrary bases; ignores what causes overheads; under- or over-absorption; output for inventory raises profit.
• ABC. For: more realistic product costs and prices; reveals loss-making lines; drivers give managers something to control. Against: costly to set up and run; still relies on judgement; facility costs such as rent lack a driver; little gain when products are similar.
• Marginal. For: no apportionment; profit tracks sales; contribution suits short-term decisions. Against: inventory leaves out fixed production overhead; marginal-cost pricing may not recover fixed costs; mixed costs need splitting.

Quick self-test

1. Define attribution.
2. Building insurance of 27,000 is shared between departments A (900 m²), B (600 m²) and C (300 m²). Apportion it.
3. A department budgets overheads of 118,800 and 5,400 direct labour hours. Calculate the OAR.
4. Using question 3, actual hours were 5,550 and actual overheads 120,600. Is overhead under- or over-absorbed, by how much, and what happens to profit?
5. A unit uses 30.00 of materials and 2.5 direct labour hours at 14 an hour in the department in question 3. Find its total cost and its price at a 25% margin.
6. An inspection pool costs 63,000 for 420 inspections. Product R uses 84 inspections; output is 2,100 units. Find the inspection cost per unit of R.
7. Suggest a cost driver for (a) goods-inward handling (b) machine maintenance.
8. Opening inventory 700 units, closing inventory 1,100 units, fixed production overhead absorbed at 4.50 a unit in both years. How do absorption and marginal profit differ?
9. Absorption costing profit is 64,300. Inventory fell by 900 units; fixed production overhead is 3.00 a unit. Find marginal costing profit.
10. An ABC total cost is 27.40. Find the price at a 15% mark-up.

Answers

1. Charging a cost pool to individual products according to the quantity of its cost driver each product uses.
2. A 13,500; B 9,000; C 4,500 (total 27,000).
3. 118,800 ÷ 5,400 = 22.00 per direct labour hour.
4. Absorbed 5,550 × 22 = 122,100; 122,100 − 120,600 = 1,500 over-absorbed, so profit is increased by 1,500.
5. 30.00 + 35.00 + 55.00 = 120.00; 120.00 ÷ 0.75 = 160.00.
6. 63,000 ÷ 420 = 150 per inspection; 84 × 150 = 12,600; ÷ 2,100 = 6.00 per unit.
7. (a) Number of deliveries received. (b) Number of maintenance visits (or machine hours).
8. Inventory rose 400 units: absorption profit is 1,800 higher (400 × 4.50).
9. Inventory fell, so marginal profit is higher: 64,300 + 900 × 3.00 = 67,000.
10. 27.40 × 1.15 = 31.51.

Where marks are usually lost

• Multiplying the OAR by budgeted hours when asked for overheads absorbed.
• Reversing the effect on profit: under-absorption reduces profit, over-absorption increases it.
• Charging a machine-led department’s overhead on labour hours because labour hours are also given.
• Dividing a cost pool by units instead of total driver quantity.
• Stopping at an attributed total without dividing by output.
• Leaving out the check that apportioned or attributed figures add back to the total.
• Pricing with a mark-up when the question says margin.
• Deducting fixed production overheads below gross profit in an absorption statement, so they are charged twice.
• Claiming absorption profit always exceeds marginal profit; the change in inventory decides.
• Judging ABC without using the figures from the business in the question.

Official syllabus

OxfordAQA International AS and A-level Accounting (9615) specification, Version 1.2, for International AS exams May/June 2025 onwards and International A-level exams May/June 2026 onwards (OxfordAQA). Section 3.2.2 Absorption and activity based costing.