Page 64 - BA2 Integrated Workbook STUDENT 2018

Chapter 4

1.3 Absorption costing

In this chapter you will learn how the “sharing out” of production overheads is
accomplished, using a costing method known as absorption costing. (Absorption
costing will be looked at in more detail in the next chapter).

Focusing on production overheads, we can look at how the overheads can be
'shared out' to the individual cost units.

 Step 1: Allocation and apportionment of production overhead to production
and service cost centres

 Step 2: Reapportionment of overhead collected in service cost centres (from
step 1) to production cost centres

 Step 3: Absorption of overheads from production cost centres into cost units
using a predetermined overhead absorption rate (OAR).

Note: The terminology is important, i.e. allocation, apportionment and absorption.

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