9706 · 2.2.2
Absorption costing flashcards
Revision flashcards for Cambridge 9706 Absorption costing (syllabus 2.2.2). Flip, recall, then mark a real past-paper question.
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OAR formula?
Budgeted production overhead ÷ Budgeted activity level.
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Under-absorption?
Actual overhead > absorbed — increases expenses (reduce profit).
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Over-absorption?
Absorbed > actual — reduces expenses (increase profit).
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Activity basis examples?
Direct labour hours, machine hours, units produced.
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Full unit cost?
Direct materials + direct labour + absorbed overhead.
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Closing inventory valuation?
Includes absorbed production overheads.
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What is the formula for the Overhead Absorption Rate (OAR)?
OAR = Budgeted Total Production Overheads / Budgeted Activity Level (e.g., labour hours, machine hours).
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How is the full production cost of a single unit calculated using absorption costing?
Direct Materials + Direct Labour + (OAR × Activity per unit). This total is the full production cost.
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What is 'under-absorption' of overheads?
When the overheads absorbed into production (OAR × Actual Activity) are less than the actual overheads incurred. It results in an additional charge in the Income Statement.
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What is 'over-absorption' of overheads?
When the overheads absorbed into production (OAR × Actual Activity) are greater than the actual overheads incurred. It results in a credit (reduction of expense) in the Income Statement.
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Why are non-production overheads excluded from the absorption costing unit cost?
Because they are period costs, not product costs. They relate to the accounting period as a whole (e.g., selling, admin) and are not part of the manufacturing process. They are charged directly to the Income Statement.
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What is the difference between allocation and apportionment of overheads?
Allocation assigns a whole cost item to a specific cost centre. Apportionment shares a general overhead cost between multiple cost centres using a fair basis.
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What is a suitable basis for apportioning factory rent costs?
Floor area occupied by each cost centre.
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What is the purpose of reapportioning service cost centre overheads?
To share the costs of non-production departments (like maintenance or stores) among the production departments they support, so that all factory overheads are included in the final product cost.
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Distinguish between a production cost centre and a service cost centre.
A production cost centre is a location where work is done directly on the product (e.g., assembly, machining). A service cost centre provides support services to production cost centres (e.g., canteen, maintenance).
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How is the closing inventory valued under absorption costing?
Closing inventory is valued at the full production cost per unit, which includes direct materials, direct labour, and a share of absorbed production overheads.