Absorption costing - lecture 4

Absorption costing

Production overheads are absorbed into the cost of the product.

Bases of apportionment

Employee numbers, floor space, plant and machinery cost, hours worked

Direct method

Costs of service departments are allocated directly to operating departments only.

Step method

Costs of service departments are allocated to other service departments and then to operating departments.

OAR

Budgeted overheads / Budgeted level of activity

Absorbed overhead

Actual activity x budgeted rate

Actual overhead

Actual activity x actual rate

Under/over absorbed overheads

Absorbed overhead - Actual overhead