Absorption Costing

Define the term "absorption costing" as used in management accounting. (2 marks)

State TWO differences between absorption costing and marginal costing in the way they treat fixed production overheads. (2 marks)

State what is meant by an "overhead absorption rate" (OAR) and state TWO methods that can be used to calculate it. (3 marks)

Wentworth Components Ltd operates a single production department. The following budgeted data is available for the year. Product K requires 3 direct labour hours and 2 machine hours per unit. (a) Calculate the overhead absorption rate (OAR) using the direct labour hour method. (1 mark) (b) Calculate the OAR using the machine hour method. (1 mark) (c) Calculate the overhead absorbed per unit of Product K under each method. (2 marks)

Stanton Engineering Ltd budgeted fixed production overheads of £168 000 and machine hours of 14 000 for October. Actual fixed production overheads incurred were £172 000 and actual machine hours worked were 13 500. (a) Calculate the overhead absorption rate (OAR) for October. (1 mark) (b) Calculate the overhead absorbed during October. (1 mark) (c) Calculate the amount of over- or under-absorption and state which it is. (2 marks)

Explain TWO reasons why a manufacturing business might choose to use machine hours rather than direct labour hours as the basis for its overhead absorption rate. (4 marks)

Define "under-absorption" of overheads and explain TWO reasons why under-absorption may occur. (4 marks)

Explain TWO limitations of using absorption costing as the basis for product pricing decisions. (4 marks)

Explain TWO advantages of activity-based costing (ABC) over traditional absorption costing. (4 marks)

Explain TWO circumstances in which activity-based costing (ABC) is most likely to be an appropriate method of overhead allocation for a manufacturing business. (4 marks)

Explain the concept of cross-subsidisation of products that can occur under traditional absorption costing. Explain how activity-based costing (ABC) reduces this problem. (4 marks)

Explain TWO actions that the management of a business using absorption costing could take to reduce the risk of significant over- or under-absorption of overheads. (4 marks)

Holbrook Ceramics Ltd produces decorative vases. The company uses absorption costing with an OAR based on budgeted production. The following data is available for September. Opening inventory is valued at the same full cost per unit as units produced in September. (a) Calculate the overhead absorption rate (OAR) per unit. (1 mark) (b) Calculate the amount of over- or under-absorption for September. (2 marks) (c) Prepare an absorption costing income statement for September. (4 marks)

Hallford Instruments Ltd manufactures two products — Standard and Premium. The following data is available for the year. Cost pools: (a) Calculate the number of batches produced for each product. (2 marks) (b) Calculate the cost driver rate for each cost pool. (2 marks) (c) Calculate the overhead cost per unit for each product using activity-based costing (ABC). (3 marks)

Linford Candles Ltd produces scented candles and has just started trading. The following data is available for July (the first month of trading). (a) Calculate the overhead absorption rate (OAR) per unit. (1 mark) (b) Prepare an absorption costing income statement for July. (3 marks) (c) Prepare a marginal costing income statement for July. (2 marks) (d) Explain why the profit figures differ between the two methods. (2 marks)

Brindley Manufacturing Ltd has two production departments (Pressing and Finishing) and one service department (Logistics). The following budgeted data is available for the year ended 31 May. Factory rent is to be apportioned on the basis of floor area. The Logistics department costs are to be reapportioned to the production departments on the basis of number of deliveries. (a) Apportion factory rent to each of the three departments. (2 marks) (b) Reapportion the total Logistics department costs to Pressing and Finishing. (2 marks) (c) Calculate the total overhead for each production department after reapportionment. (2 marks) (d) The company uses machine hours as the basis for its OAR. Calculate the OAR for each production department. (2 marks) (e) Product J requires 4 machine hours in Pressing and 3 machine hours in Finishing. Calculate the total overhead absorbed by one unit of Product J. (2 marks)

Evaluate the benefits and limitations of absorption costing as a method of allocating overheads to products in a manufacturing business. (10 marks)