Accounting · Study Guide
Key Points
Absorption costing allocates all production overheads to products so profit reflects full cost of production
Activity-based costing (ABC) assigns overheads based on the activities that cause them, improving accuracy
Choice of costing method affects reported profit and impacts product pricing and make-or-buy decisions
Exam Focus
Calculate absorbed costs using traditional and ABC methods. Compare results and justify which method better reflects actual cost behaviour.
Must-Know Terms
Cross-Theme Connections
Marginal costing
Marginal costing is contrasted with absorption costing for decision-making
Standard costing and variance analysis
Standard costs are set using absorption or ABC costing bases
Capital investment appraisal
Costing methods inform capital investment appraisal decisions