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    3 Revision of Absorption Costing: Key Term

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    Syed Attique Kazmi
    The document discusses the process of absorption costing which involves allocating, apportioning, and absorbing overhead costs. It involves general overhead apportionment and service department cost apportionment. The document then provides an overview of the key steps in absorption costing including allocation, the two stages of apportionment, and absorption of overhead costs into product costs using overhead absorption rates.

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    3 Revision of Absorption Costing: Key Term

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    Syed Attique Kazmi
    54 views2 pages
    The document discusses the process of absorption costing which involves allocating, apportioning, and absorbing overhead costs. It involves general overhead apportionment and service department cost apportionment. The document then provides an overview of the key steps in absorption costing including allocation, the two stages of apportionment, and absorption of overhead costs into product costs using overhead absorption rates.

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    The document discusses the process of absorption costing which involves allocating, apportioning, and absorbing overhead costs. It involves general overhead apportionment and service department cost apportionment. The document then provides an overview of the key steps in absorption costing including allocation, the two stages of apportionment, and absorption of overhead costs into product costs using overhead absorption rates.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    54 views2 pages

    3 Revision of Absorption Costing: Key Term

    Uploaded by

    Syed Attique Kazmi
    The document discusses the process of absorption costing which involves allocating, apportioning, and absorbing overhead costs. It involves general overhead apportionment and service department cost apportionment. The document then provides an overview of the key steps in absorption costing including allocation, the two stages of apportionment, and absorption of overhead costs into product costs using overhead absorption rates.

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    © All Rights Reserved
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    3 Revision of absorption costing

    FAST FORWARD
    Absorption costing is a traditional approach to dealing with overheads, involving three stages: allocation,
    apportionment and absorption.
    Apportionment has two stages: general overhead apportionment and service department cost apportionment.

    Key term Absorption costing is a method of product costing which aims to include in the total cost of a product
    (unit, job, and so on) an appropriate share of an organisation's total overhead, which is generally taken to
    mean an amount which reflects the amount of time and effort that has gone into producing the product.

    You should have covered absorption costing in your earlier studies. We will therefore summarise the
    simpler points of the topic but will go into some detail on the more complex areas to refresh your
    memory.

    Knowledge brought forward from earlier studies

    Absorption costing
    · Product costs are built up using absorption costing by a process of allocation, apportionment and
    overhead absorption.
    · Allocation is the process by which whole cost items are charged directly to a cost unit or cost
    centre. Direct costs are allocated directly to cost units. Overheads clearly identifiable with cost
    centres are allocated to those cost centres but costs which cannot be identified with one particular
    cost centre are allocated to general overhead cost centres. The cost of a warehouse security guard
    would therefore be charged to the warehouse cost centre but heating and lighting costs would be
    charged to a general overhead cost centre.

    · The first stage of overhead apportionment involves sharing out (or apportioning) the overheads
    within general overhead cost centres between the other cost centres using a fair basis of
    apportionment (such as floor area occupied by each cost centre for heating and lighting costs).

    · The second stage of overhead apportionment is to apportion the costs of service cost centres
    (both directly allocated and apportioned costs) to production cost centres.

    · After the apportionment of production overheads, all the overhead costs have been divided or
    shared between the production departments. The final stage in absorption costing is the
    absorption into product costs (using overhead absorption rates) of the overheads that have been
    allocated and apportioned to the production cost centres.

    · An overhead absorption rate is calculated for each production department (or for production
    activity as a whole). Typically, this is an absorption rate per direct labour hour worked or an
    absorption rate per machine hour worked.

    Question Cost apportionment

    Briefly discuss the factors which could affect the choice of the bases an organisation may use to apportion
    service department costs.

    6 1: Costing ½ Part A Specialist cost and management accounting techniques


    Answer
    (a) The type of service being provided by the service department
    (b) The amount of overhead expenditure involved
    (c) The number of departments benefiting from the service
    (d) The ability to be able to produce realistic estimates of the usage of the service by these departments
    (e) The resulting costs and benefits

    Question More cost apportionment

    A company is preparing its production overhead budgets and determining the apportionment of those
    overheads to products. Cost centre expenses and related information have been budgeted as follows.
    Machine Machine Mainten-
    Total shop A shop B Assembly Canteen ance
    $ $ $ $ $ $
    Indirect wages 78,560 8,586 9,190 15,674 29,650 15,460
    Consumable materials 16,900 6,400 8,700 1,200 600 –
    Rent and rates 16,700
    Buildings insurance 2,400
    Power 8,600
    Heat and light 3,400
    Depreciation (machinery) 40,200
    Value of machinery 402,000 201,000 179,000 22,000 – –
    Power usage (%) 100 55 40 3 – 2
    Direct labour (hours) 35,000 8,000 6,200 20,800 – –
    Machine usage (hours) 25,200 7,200 18,000 – – –
    Area (sq ft) 45,000 10,000 12,000 15,000 6,000 2,000
    Required
    Using the direct apportionment to production departments method and bases of apportionment which you
    consider most appropriate from the information provided, calculate overhead totals for the three
    production departments.

    Answer
    Main- Basis of
    Total A B Assembly Canteen tenance apportionment
    $ $ $ $ $ $
    Indirect wages 78,560 8,586 9,190 15,674 29,650 15,460 Actual
    Consumable materials 16,900 6,400 8,700 1,200 600 – Actual
    Rent and rates 16,700 3,711 4,453 5,567 2,227 742 Area
    Insurance 2,400 533 640 800 320 107 Area
    Power 8,600 4,730 3,440 258 – 172 Usage
    Heat and light 3,400 756 907 1,133 453 151 Area
    Depreciation 40,200 20,100 17,900 2,200 – – Val of mach
    166,760 44,816 45,230 26,832 33,250 16,632
    Reallocate – 7,600 5,890 19,760 (33,250) – Direct labour
    Reallocate – 4,752 11,880 – – (16,632) Mach usage
    Totals 166,760 57,168 63,000 46,592 – –

    Part A Specialist cost and management accounting techniques ½ 1: Costing 7

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