Use of absorption costing to calculate the total cost of a product: terminology including allocation, apportionment, absorption, under-absorption, over-absorption
Absorption costing builds the full cost of a product by sharing all factory overheads across every unit made. Five key terms describe how businesses do this sharing.
Formula
Overhead Absorption Rate = Budgeted Overheads ÷ Budgeted Activity Level
Real World
Jaguar Land Rover allocates the Solihull factory's electricity bill directly to that plant, then apportions shared head-office HR costs across all three UK factories based on employee numbers.
Exam Focus
Define each term precisely — examiners distinguish allocation (whole cost, one centre) from apportionment (shared cost, split across centres).
Essay Framework
Use PEEL to structure every paragraph. Tap each step for guidance and an example.
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