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Practical Application for Absorption - Overheads, Cost Accounting Video Lecture | Cost Accounting - B Com
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FAQs on Practical Application for Absorption - Overheads, Cost Accounting Video Lecture - Cost Accounting - B Com
| 1. What are absorption overheads in cost accounting? |  |
Absorption overheads in cost accounting refer to the indirect costs that are allocated to products or services based on a predetermined absorption rate. These overheads include expenses such as rent, utilities, depreciation, and salaries that cannot be directly traced to a specific product or service. The absorption rate is calculated by dividing the total overhead costs by a chosen cost driver, such as direct labor hours or machine hours.
| 2. How are absorption overheads allocated to products? | |
Absorption overheads are allocated to products using a predetermined absorption rate. This rate is calculated by dividing the total overhead costs by the total units of the chosen cost driver. For example, if the total overhead costs are $10,000 and the total direct labor hours are 1,000, the absorption rate would be $10 per direct labor hour. This rate is then multiplied by the number of direct labor hours used to produce each product to allocate the overhead costs.
| 3. What is the purpose of allocating absorption overheads? | |
The purpose of allocating absorption overheads is to properly assign indirect costs to products or services. By allocating these costs, businesses can accurately determine the total cost of producing each product and make informed decisions regarding pricing, profitability, and cost control. It also helps in ensuring that each product bears a fair share of the indirect costs, leading to more accurate financial statements and performance evaluations.
| 4. What are the advantages of using absorption overheads in cost accounting? | |
Using absorption overheads in cost accounting has several advantages. Firstly, it provides a more accurate representation of the total cost of producing each product by including both direct and indirect costs. This helps in setting competitive prices and evaluating profitability. Secondly, it ensures that each product bears a fair share of the overhead costs, avoiding cost distortions. Lastly, it helps in identifying inefficient processes or products by highlighting the amount of overhead costs allocated to them.
| 5. Can absorption overheads be adjusted if the actual overhead costs differ from the allocated amount? | |
Yes, absorption overheads can be adjusted if the actual overhead costs differ from the allocated amount. This adjustment is usually done at the end of the accounting period through a process called overhead absorption reconciliation. The difference between the actual overhead costs and the allocated amount is known as under/over absorption. It is adjusted by either increasing or decreasing the overhead allocation rate for future periods to bring it in line with the actual costs incurred. This ensures that the absorption rate remains accurate for cost allocation purposes.
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Dec 23, 2024 Last updated |
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