Apportionment Sechedule for Product ABC
Profit Centres Service centre
Name of cost Basis of apportionment Total Cutting Assembly Maintanance Stores Administration
Depreciation Charge for Machinery Carrying amount of machinery 14000 6276 7724
Power of Production Machinery KwH usage 17000 7792 9208
Rent & Rates of Premises Floor area 18000 5625 2813 4641 2109 2813
Light & Heat for Premises Floor area 20000 6250 3125 5156 2344 3125
Indirect labour Costs Allocated 246050 102000 84000 60050
Total 315050 25943 22870 111797 88453 65988
Reallocation of Maintence Department 78258 33539 -111797
Reallocation of Store Cost 70763 17691 -88453
Reallocation of Admin Department 32994 32994 -65988
Total after Service Department 315050 207957 107093 0 0 0
Direct Labour Hours Allocated 69000 13800 55200
Overhead Absorbtion Rate (OAR) 15.07 1.94
Product Number ABC
Prime Cost Make up costs for Product ABC
Direct material 9kg @ £140 per kg 1260
Labour 4 hours 15 minutes @ £16ph 68
Total prime cost 1328
Overheads
3hrs in Cutting Department 45.208
4hrs in Assembly Department 7.760
52.968
Therefore total cost 1380.968
Profit (100% profit margin) 1380.968
Therefore total cost Profit (100% profit margin)
Retail price 2761.937 Therefore total cost Profit (100% profit margin)
What is Absorption Costing?
The CIMA Official Terminology defines absorption costing as “a method of costing that, in addition to direct costs, assigns all, or a proportion of, p
units by means of one or a number of overhead absorption rates.”. (“An Effective Guide on Absorption Costing: Advantages & Examples”)
What is the advantage of using absorption costing?
There are several advantages of using absorption costing, the main one being that it is require for compliance with GAAP (Generally Accepted Ac
under absorption costing stock is not under-valued because it accounts both directly attributable expenses (mostly variable) and the fixed manuf
Secondly, absorption costing provides the most realistic total costs associated with the cost of production, this includes the direct costs and varia
includes the company’s fixed costs of operation such as salaries premises rental and utility bills. Absorption costing provides a complete picture o
company determine prices for products. Lastly, absorption costing could also help with profitability as it can provide a more accurate picture than
What businesses would benefit from this approach?
“Public companies are required to use the absorption costing method in cost accounting management for their COGS.” (Maverick) Other compan
approach is start-up companies and small business as it provides a more accurate picture of their accounts which could help them stay on top of
realistic price on products. “The absorption costing is the best way of costing for smaller companies. Adoption of absorption costing makes calcul
it is unlikely that these entities have a lot of products. Additionally, it makes these businesses able to absorb fixed costs in advance and sell their p
price’ as well as profits.” (Javed).
“An Effective Guide on Absorption Costing: Advantages & Examples.” Deskera Blog, 9 Dec. 2021,
[Link]/blog/absorption-costing/. Accessed 21 Feb. 2022.
Javed, Rashid. “Advantages and Disadvantages of Absorption Costing - Accounting f
Management.” Accounting for Management, 12 Jan. 2019, [Link]/advantages-
and-disadvantages-of-absorption-costing/. Accessed 21 Feb. 2022.
Maverick, J.B. “Absorption Costing: Advantages and Disadvantages.” Investopedia, 17 May 2021,
[Link]/ask/answers/052715/what-are-some-advantages-and-disadvantages-absorption
[Link]. Accessed 21 Feb. 2022.
Total
14000
17000
18000
20000
246050
315050
315050
69000
portion of, production overhead costs to cost
es”)
Accepted Accounting Principles), this is because
fixed manufacturing overheads. (Javed).
ts and variable costs. Absorption costing also
ete picture of cost per unit and can help a
picture than variable costing. (Maverick)
her companies that could benefit from this
y on top of their spending as well as setting
makes calculations easier for small businesses as
d sell their products on a more realistic ‘selling
Apportionment Sechedule for Product ABC
Profit Centres Service centre
Name of cost Basis of apportio Total Cutting Assembly Maintanance Stores Administration Total
Depreciation Charge for M Carrying amount 14000 6276 7724 14000
Power of Production MachiKwH usage 17000 7792 9208 17000
Rent & Rates of Premises Floor area 18000 5625 2813 4641 2109 2813 18000
Light & Heat for Premises Floor area 20000 6250 3125 5156 2344 3125 20000
Indirect labour Costs Allocated 246050 102000 84000 60050 246050
Total 315050 25943 22870 111797 88453 65988 315050
Reallocation of Maintence Department 78258 33539 -111797
Reallocation of Store Cost 70763 17691 -88453
Reallocation of Admin Department 32994 32994 -65988
Total after Service Department 315050 207957 107093 0 0 0 315050
Direct Labour Hours Allocated 69000 13800 55200 69000
Overhead Absorbtion Rate (OAR) 15.07 1.94
Product Number ABC
Prime Cost Make up costs for Product ABC
Direct material 9kg @ £140 per kg 1260
Labour 4 hours 15 minutes @ £16ph 68
Total prime cost 1328
Overheads
3hrs in Cutting Department 45.208
4hrs in Assembly Department 7.760
52.968
Therefore total cost 1380.968
Profit (100% profit margin) 1380.968
Retail price 2761.937
Therefore total cost Profit (100% profit margin)