MODULE TITLE:  BUSINESS MANAGEMENT TECHNIQUES

TOPIC TITLE:  COSTING TECHNIQUES

LESSON 1:  ABSORPTION COSTING

INTRODUCTION - In this lesson we first provide a background to cost accounting including the reasons why it is required and how costs are classified.  We then examine the absorption costing technique and the way in which it is used to deal with business overheads.

YOUR AIMS - At the end of this lesson you should be able to:

• appreciate the need for cost accounting
• classify costs by set categories
• appreciate different methods of costing
• understand what is meant by absorption costing
• allocate overheads to cost units by applying standard principles
• calculate overhead recovery rates for products/jobs
• appreciate the role of overhead recovery in budgeting.

Questions -

1. What is the difference between a cost unit and a cost centre?

2. State which method of costing (i.e. job, contract or process costing) may be appropriate for the following products:

(i) mass produced microwave oven

(ii) domestic dwelling building extension

(iii) a chemical plant shutdown.

3. What is absorption costing?

4. Crundy Ltd manufacture domestic appliances.  You are given the following information relating to one month's normal production:

If the total overheads in the month are £16 000, what is the overhead cost for a single unit of each appliance?

5. Tabihat Ltd has three production cost centres.  Its production overhead costs for the year were as follows:

Basic data for the same period is:

Using the above information, prepare a cost allocation statement for the period, allocating the cost over the three centres and stating the basis of your allocation.