Absorption costing calculations: allocation of direct costs, apportionment of indirect costs, overhead absorption rates
Absorption costing builds the full cost of a product by adding direct costs directly to it and sharing indirect costs (overheads) across products using a calculated rate.
Formula
Total Unit Cost = Direct Materials + Direct Labour + (OAR × Activity per Unit)
Real World
Brewdog allocates hops and malt costs directly to each beer, then apportions brewery rent by floor area and absorbs the resulting overhead rate per machine hour into every can of Punk IPA.
Exam Focus
Show each apportionment basis clearly in your workings — marks are awarded for method, not just the final overhead rate.
Essay Framework
Use PEEL to structure every paragraph. Tap each step for guidance and an example.
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