Mobin Shaikh

 Upon completion of this Topic, you should be able to:

 Understand Meaning of Absorption Costing

 Appreciate factors influencing choice of Cost Centre
 Cost allotment and overheads absorption
 A cost accumulation system accumulates cost by responsibility
centers and allocate those costs to cost units pass through the
responsibility centre.

 Overhead cost is an expenditure on labor, materials or services

which cannot be economically identified with a saleable cost unit.

 Marginal costing is an accounting technique which differentiates

between fixed and variable costs and ascertains their effects on
profits of changes in volume or production.

 Absorption (full) costing is a system in which all the fixed

manufacturing overheads are allocated to products. Under
absorption costing, variable as well as fixed production costs are
charged to stocks.
 The extent to which costs can be separately identified to
different areas of activity.
 Responsibility of individuals for separate parts of an
organization
 The effect on the accuracy of the charging of cost to other cost
centers or to units of output.
 The problems with overheads are in three-folds:
 For cost and management accountants

◦ when producing budgets and standard cost cards

◦ when trying to establish how much an individual unit of output has
actually cost.

 When budgeting

• determine just how overheads vary with level of activity (many are semi-
variable in nature and there is constant debate over a suitable measure of
activity level)
• deciding whether or not to include fixed overheads in the standard cost
card (whether to use absorption costing and treat fixed overheads as a
product cost or use marginal costing and treat them as period cost)
 When recording actual costs

 when recording direct materials costs, a document system can

be set up to show how much materials have been drawn from
stores and what that materials cost
 when recording how much time production staff spent making
a particular unit ( or batch of units).
 Cost allotment (apportionment) is that part of
cost attribution which shares cost among two
or more cost centers or cost units in
proportion to the estimated benefit received,
using a proxy. The basis upon which the
allotment is made varies from cost to cost.
 Cost Basis of Apportionment

Rent, rates, cleaning Floor area / Space occupied

Light , heat Floor area / Space occupied

Power Kilowatt hours / Capacity of machinery / Horespower

Employee related costs Number of employees / Wages cost

Depreciation of plant and machinery Value of machinery / Age of machinery

Insurance of plant and machinery Value of machinery

Canteen costs, welfare, general administration, industrial Number of employees

relations
Store-keeping Stores requisitions

Material handling Weight of materials

 Essel Mfg. Co. incurs the following overhead costs:

Cost Amt. Rs.

Machining Dept 2,900

Finishing Dept 4,800

Power 4,000

Rent 8,000

Canteen 4,000
 The following additional information are given:

 Area occupied Machining Dept 2,500 sq. m

Finishing Dept 1,000 sq. m
Canteen 500 sq. m

 Horsepower of machinery Machining Dept 3.000 kh

Finishing Dept 1,000 kh

 Number of employees Machining Dept 50

Finishing Dept 150

 Apportion costs to the Machining and Finishing departments.

 Basis Power Rent Canteen Machining Finishing
Direct (D) (D) (D) (D) (D)

- 4,000 8,000 4,000 2,900 4,800

Apportionment:
Horsepower (4,000) - - 3,000 1,000
Power

Rent Area occupied - (8,000) 1,000 5,000 2,000

No. of - - (5,000) 1,250 3,750

Canteen employees

- - 12,150 11,550