Absorption costing · AS Level Accounting

A business provides the following information.

What is the over-absorption or under-absorption of overheads?

• A$56000 over-absorbed
• B$56000 under-absorbed
• C$84000 over-absorbed
• D$84000 under-absorbed

After the first year of operation, a company calculated the profit by using both the absorption costing and marginal costing methods. The profit was different under each method. What has caused the difference in profit?

• AThe actual sales volume is less than the budgeted sales volume.
• BSome overheads are classified as semi-variable.
• CThere is an inventory of finished goods at the year-end.
• DThere is an inventory of direct materials at the year-end.

A company provides the following information.

What is the overhead absorption rate per labour hour?

A company calculated its profits using both the marginal costing method and absorption costing method. The profits were the same. Which statement about the company’s production units is correct? A They were greater than the break-even units. B They were greater than the sales units. C They were the same as the break-even units. D They were the same as the sales units.

In the month of June, a manufacturing business produced 1200 units and sold 1000 units. There was no inventory on 1 June. The following information is also available.

Which statement is correct?

• AAbsorption costing profit is more than marginal costing profit by $5000.
• BAbsorption costing profit is less than marginal costing profit by $5000.
• CAbsorption costing profit and marginal costing profit are the same at $8000.
• DAbsorption costing profit and marginal costing profit are the same at $15000.

A business provides the following information.

What is the over-absorption or under-absorption of overheads?

• A$56000 over-absorbed
• B$56000 under-absorbed
• C$84000 over-absorbed
• D$84000 under-absorbed

After the first year of operation, a company calculated the profit by using both the absorption costing and marginal costing methods. The profit was different under each method. What has caused the difference in profit?

• AThe actual sales volume is less than the budgeted sales volume.
• BSome overheads are classified as semi-variable.
• CThere is an inventory of finished goods at the year-end.
• DThere is an inventory of direct materials at the year-end.

Which costing method is most suitable for fixing a selling price and which is most suitable for deciding whether to make or buy in a product?

A business has the following budgeted information.

What is the budgeted overhead absorption rate per unit?

What is the most appropriate way to apportion the rent of a factory to each department?

• Afloor space
• Bnumber of employees
• Cproduction output
• Dvalue of machinery

The table shows figures for a factory’s production in one week.

What is the actual amount of production in the week?

W Limited is unsure whether to use marginal costing or absorption costing. Which row is correct?

A manufacturing company uses absorption costing. The following information for one month is available for the cutting department.

What overhead absorption rate would have been used?

• A$14.29 per machine hour
• B$15.17 per labour hour
• C$15.38 per labour hour
• D$16.30 per machine hour

A business provides the following information.

Fixed production overheads are absorbed at $10 per labour hour. What is the total absorption cost per unit?

The following information is available.

By how much are production overheads under-absorbed or over-absorbed?

• A$6000 over-absorbed
• B$6000 under-absorbed
• C$8000 over-absorbed
• D$8000 under-absorbed

Which basis should be used to apportion stores overheads to production departments?

• Anumber of employees in each production department
• Bnumber of machines in each production department
• Cnumber of requisitions made by each production department
• Dnumber of units produced in each production department

The following information relates to a company’s previous accounting period.

What was the overhead absorption rate per unit during the accounting period?

The following table shows details of production for a week.

How many units were produced during the week?

P Limited uses an overhead absorption rate of $15 per machine hour, based on budgeted machine hours of 8000 per month. In July, production required 8500 machine hours, and the under-absorption of overheads amounted to $16 500. What were the actual overheads in July?

Which statement describes the purpose of overhead allocation?

• Aassignment of specific costs to production departments
• Bassignment of specific costs to service departments
• Csharing out common costs between production departments
• Dsharing out common costs between service departments

The following table shows details of production for a week.

How many units were produced during the week?

A business uses absorption costing. Which costs will be charged to production? A direct materials, direct labour, variable overheads and fixed overheads B direct materials, direct labour and fixed overheads only C direct materials, direct labour and variable overheads only D direct materials and direct labour only

The following data applies to a business.

What were the actual overheads for the period?

Y Limited is a manufacturing company which makes a range of food products. The company uses absorption costing. The factory has two production departments: baking and packaging. There are also two service departments: stores and canteen. Some budgeted overheads have already been allocated to departments as follows:

The following budgeted overheads for July 2026 are to be apportioned between the departments.

(a) Complete the table to show the apportionment of overheads and the reapportionment of service department overheads. [7 marks]

The following additional information is available:

Reapportionment of the service department overheads is to be based on the following budgeted information for July 2026.

(b) Calculate, to two decimal places, the overhead absorption rates for each of the two production departments. baking department packaging department [4 marks]

The following budgeted information is available for the production departments for July 2026.

(c) State two reasons why overheads could be over‑absorbed in the packaging department. [2 marks]

In a recent month, overheads were over‑absorbed in the packaging department.

(d) Calculate the selling price of the order. [6 marks]

Y Limited has received an order for products to be produced in July 2026. The order will require the following:

The company’s policy is to achieve a gross profit margin of 50%.

(e) Advise the directors whether or not this order should be accepted. Justify your answer by considering the advantages and disadvantages of accepting the order. Calculations are not required. [5 marks]

Currently, the factory is operating at full capacity. However, the directors are concerned that some regular customers have indicated they may reduce demand in future months, which could reduce output to 96%. The directors have been approached by a new customer who is prepared to place an order which will require 8% of one month’s total output. However, the customer expects to be offered a special price, reducing the gross profit margin to 40%.

(f) State two features of the AVCO method of inventory valuation. [2 marks]

The stores department uses the weighted average cost (AVCO) method to value inventory. Inventory is managed using the just in time (JIT) system.

(g) Explain one advantage and one disadvantage of the JIT system of inventory management. advantage ................................................................................................................................. disadvantage ............................................................................................................................ [4 marks]

B Limited uses absorption costing at one of its factories where two products are made: Wye and Zed. The budgeted production for January 2026 is as follows:

Budgeted overheads for January 2026 are $67 890.

(a) Calculate, to two decimal places, the overheads to be absorbed by one unit of each product using the direct labour hour method. Wye ........................................................................................................................................... Zed ........................................................................................................................................... [4 marks]

(b) Calculate the total amount of overheads absorbed by each product if budgets are met. Wye ........................................................................................................................................... Zed ............................................................................................................................................ [2 marks]

(c) State two reasons why overheads may be under-absorbed. [2 marks]

(d) Calculate the total selling price for the order. [5 marks]

The following additional information is available about product Zed.

• One unit of product Zed requires direct materials costing $7.
• The direct labour rate is $11 per hour.

(e) Calculate the current profit per month. [4 marks]

B Limited manufactures a single type of product at a second factory where marginal costing is used. The following budgeted information is available.

The company relies on one supplier who is currently only able to supply a limited quantity of direct materials. As a result, the factory is producing 14 000 units per month, which is 70% of normal capacity. Currently, the supplier delivers direct materials 4 times each month. Each delivery incurs carriage charges of $4300. Fixed costs per month are forecast to be $136 000 including carriage charges.

(f) Prepare a marginal costing statement for one month if the directors use the overseas supplier. [6 marks]

The directors have contacted an overseas supplier of direct materials.

• The materials will cost $20 per kg, which includes carriage charges.
• The supplier will make one delivery of direct materials each month. The overseas supplier is prepared to supply sufficient materials for B Limited to work at 90% of normal capacity.

(g) Advise the directors whether or not they should purchase the direct materials from the overseas supplier. Justify your answer by discussing both financial and non-financial factors. [7 marks]

W Limited manufactures a single type of product at one of its factories. Currently, marginal costing is used, but the directors have been considering switching to absorption costing.

(a) Identify two features of absorption costing. [2 marks]

(b) Prepare an absorption costing statement to show the profit for September 2024. [6 marks]

The following information is available for September 2024.

There was no inventory on 1 September 2024.

(c) Explain why the profit for marginal costing is different to the profit for absorption costing. [2 marks]

Using marginal costing, the profit for September has been calculated as $26 400.

(d) Calculate the total monthly profit to be made if Option A is chosen. [6 marks]

At a second factory, two different types of products, Wye and Zed, are made, and marginal costing is used. The following budgeted information is available.

The budgeted production and sales for one month are: Wye 4000 units and Zed 1200 units. Demand for Zed has fallen recently and the directors have been considering the following options. Option A 1 Stop production of Zed and increase production and sales of Wye by 15%. 2 All employees will be switched to producing Wye instead of Zed. These employees will need retraining at a cost of $3000. 3 The supplier of materials for Wye will give a larger trade discount as a result of increased orders. Currently the supplier gives a 20% trade discount. This will increase to 30%. 4 It is possible to produce 4400 units of Wye in normal working conditions. Direct labour is paid a premium of 25% for any overtime working. Option B 1 Boost sales of Zed by 20% on current levels by improving its quality. 2 The selling price per unit of Zed will increase by 5%. 3 Direct material cost per unit of Zed will increase to $33 per unit. 4 Direct labour rate per unit of Zed will increase by 10%. 5 The current advertising campaign for Zed, which costs $1300 per month, will be stopped. 6 A sales commission will be paid of $3 per unit for every sale up to the current level of 1200 units per month of Zed, and $5 per unit for every unit over and above 1200 units per month. 7 There is sufficient factory capacity to cover the increased production of Zed.

(e) Prepare a marginal costing statement to show the total monthly profit to be made if Option B is chosen. [7 marks]

(f) Advise the directors which option they should choose. Justify your choice by discussing both financial and non-financial factors. [7 marks]

V Limited is a manufacturing company which uses absorption costing at one of its factories.

(a) Explain two differences between marginal costing and absorption costing. [4 marks]

(b) Complete the table to show the reapportionment of service department overheads. [4 marks]

At one of its factories, V Limited has two production departments: cutting and assembly. There are also two service departments: maintenance and stores. All budgeted overheads for the year ended 30 September 2025 have been allocated to departments as follows:

allocated The following additional budgeted information is available about the departments.

(c) Calculate, to two decimal places, the overhead absorption rates for each department for the year ended 30 September 2025. Cutting department Assembly department [4 marks]

The following forecast information is available for the two production departments for the year ended 30 September 2025.

(d) Calculate the over‑absorption or under‑absorption of overheads for the assembly department for the year ended 30 September 2025. [3 marks]

For the year ended 30 September 2025, actual results for the assembly department were as follows:

(e) Calculate the selling price of the order. [5 marks]

An order was received from a customer in August 2025. The following information is available.

Products are sold with a gross profit margin of 40%.

(f) Calculate the profit or loss which would be made on the order from the overseas customer. [1 marks]

V Limited uses marginal costing at another factory where a single type of product is made. The following budgeted information is available.

Fixed costs per month are $48 000. Currently, the monthly production and sales are 7200 units which is 60% of normal capacity. However, demand for the product has been falling in recent months. The directors have received an enquiry from an overseas customer who is located in a new market area. 1 The customer would make an order for 1500 units. 2 The customer would pay a reduced price of $29 per unit. 3 V Limited would incur delivery charges of $375 on the order.

(g) Advise the directors whether or not they should accept the order from the overseas customer. Justify your answer by discussing both the advantages and disadvantages of accepting the order. [7 marks]

(h) Explain the key principle of the just in time (JIT) method of inventory control. [2 marks]

Ameerah’s business uses absorption costing.

(a)(i) Define the following terms: cost centre [1 marks]

(a)(ii) Define the following terms: fixed cost [1 marks]

(a)(iii) Define the following terms: indirect labour. [1 marks]

(b) Complete the table to show the total overheads for each department and the reapportionment of service department overheads. [5 marks]

The business operates two production departments: Processing and Assembly, and it operates two service departments: Maintenance and Stores. The following budgeted information is available.

(c) Calculate, to two decimal places, an overhead absorption rate for each production department, using a suitable basis. Processing department Assembly department [4 marks]

Budgeted hours for each production department were as follows:

(d) State two reasons why overheads may be under-absorbed. [2 marks]

(e) Calculate the amount saved per unit by paying experienced labour at a higher rate. [3 marks]

The following information is available about pay rates for direct labour in the Processing department.

• Normally direct labour is paid $9.60 per hour for a 32-hour week. Normal output is 24 units per hour.
• Sometimes more experienced direct labour is available and is paid $10.50 per hour for a 30-hour week. Normal output is 30 units per hour.
• The company expects to make a gain on the cost of labour per unit by paying a higher rate to more experienced employees.

(f) Prepare a statement to show the total selling price for the customer’s order. [8 marks]

A customer has made an order for 300 units of a product. Each unit will require the following:

Direct labour rate will be as follows:

Selling prices are set to achieve a profit margin of 60%.

(g) Advise Ameerah whether or not she should use marginal costing rather than absorption costing. Justify your advice. [5 marks]

Ameerah is concerned that she may be losing customers due to high selling prices. She has been considering using marginal costing rather than absorption costing in order to enable more competitive pricing.

Ameerah’s business uses absorption costing.

(a)(i) Define the following terms: cost centre [1 marks]

(a)(ii) Define the following terms: fixed cost [1 marks]

(a)(iii) Define the following terms: indirect labour. [1 marks]

(b) Complete the table to show the total overheads for each department and the reapportionment of service department overheads. [5 marks]

The business operates two production departments: Processing and Assembly, and it operates two service departments: Maintenance and Stores. The following budgeted information is available.

(c) Calculate, to two decimal places, an overhead absorption rate for each production department, using a suitable basis. Processing department Assembly department [4 marks]

Budgeted hours for each production department were as follows:

(d) State two reasons why overheads may be under-absorbed. [2 marks]

(e) Calculate the amount saved per unit by paying experienced labour at a higher rate. [3 marks]

The following information is available about pay rates for direct labour in the Processing department.

• Normally direct labour is paid $9.60 per hour for a 32-hour week. Normal output is 24 units per hour.
• Sometimes more experienced direct labour is available and is paid $10.50 per hour for a 30-hour week. Normal output is 30 units per hour.
• The company expects to make a gain on the cost of labour per unit by paying a higher rate to more experienced employees.

(f) Prepare a statement to show the total selling price for the customer’s order. [8 marks]

A customer has made an order for 300 units of a product. Each unit will require the following:

Direct labour rate will be as follows:

Selling prices are set to achieve a profit margin of 60%.

(g) Advise Ameerah whether or not she should use marginal costing rather than absorption costing. Justify your advice. [5 marks]

Ameerah is concerned that she may be losing customers due to high selling prices. She has been considering using marginal costing rather than absorption costing in order to enable more competitive pricing.

D Limited is a manufacturing company which uses absorption costing. The factory has two production departments, Cutting and Finishing. It also has two service departments, Stores and Canteen. Some budgeted overheads have been allocated to departments as follows:

allocated The following budgeted overheads have yet to be allocated or apportioned.

Apportionment is based on the following information.

(a) Complete the following table to show the apportionment of overheads and the reapportionment of service department overheads. [5 marks]

(b) Calculate, to two decimal places, an overhead absorption rate for each production department, using a suitable basis. Cutting department Finishing department [4 marks]

Budgeted hours for each production department were as follows:

(c) Complete the following table to show the value of the closing inventory of component X, using AVCO. [5 marks]

The Stores department issues component X to the Finishing department. The weighted average cost (AVCO) method of inventory control is used by the Stores department. The following details about this component are available for January 2025. On 1 January 2025, the Stores department held six component X in inventory which had cost $8 each.

Workings:

(d)(i) Calculate the profit to be made in August 2025 for each option. Option A [6 marks]

D Limited uses marginal costing at another factory where two products, Bee and Cee, are made. The following forecast information is available for August 2025.

Fixed costs are $1100 per month. The supplier of direct materials has notified the directors that delivery problems will mean that in August 2025 only 70% of the forecast requirement for direct materials will be available. The directors are considering two options for August 2025. Option A: Organise production in order to produce the maximum profit with the available materials. Option B: Purchase additional materials from a new overseas supplier to make up the shortfall. The supplier charges $5 per kg.

(d)(ii) Calculate the profit to be made in August 2025 for each option. Option B [3 marks]

D Limited uses marginal costing at another factory where two products, Bee and Cee, are made. The following forecast information is available for August 2025.

Fixed costs are $1100 per month. The supplier of direct materials has notified the directors that delivery problems will mean that in August 2025 only 70% of the forecast requirement for direct materials will be available. The directors are considering two options for August 2025. Option A: Organise production in order to produce the maximum profit with the available materials. Option B: Purchase additional materials from a new overseas supplier to make up the shortfall. The supplier charges $5 per kg.

(e) Advise the directors which option they should choose. Justify your answer. [7 marks]