Aborptiion cost of production

System
System Posts: 100,534 🤖 Admin 🤖
edited June 18 in AAT student discussion
Hi Me again!

Can anyone explain in simple terms please how the absorption cost of production budget works?

I am doing PCR June 05 paper 1.1G and they have used 4000 units of labour as worked out above however I cannot see why?

I am struggling to understand the difference of the marginal and absorption and the more I try to the more stressed I am getting.

Please help I get through one thing and find another one that I am stuck on!

Thank you

Cat12

Comments

  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:Aborptiion cost of production

    Just had a quick luck (havent got time to do the question just this minute sorry)

    It states in additional info that fixed overheads are charged to production @ £4.00 per labour hour.

    How many labour hours have you worked out are required?
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:Aborptiion cost of production

    Marginal costing: this only considers variable overheads (overheads that very with the level of output) not fixed overheads.

    Absorption costing: this considers variable overheads and fixed overheads. The problem is that if a cost is fixed how much do you charge to different products? Thats what absorption costing attempts to do - spread the cost of fixed overheads across several products.
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:Aborptiion cost of production

    Hi Paul,

    You can make 2 a hour and production is 2000 so the answer to the production question was 4000. I can almost see it but it is just not registering yet.
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:Aborptiion cost of production

    ok. So you can make two an hr - production is 2000.

    So 2000 / 2 = 1000 (hrs)

    1000 (hrs) x f/ohead absorbtion rate @ £4.00 / hr = £4000.00
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:Aborptiion cost of production

    that makes it clear now thank you for helping me
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:Aborptiion cost of production

    Your welcome

    Paul

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