Absorption and Activity Based Costing
Allocating and apportioning overheads, calculating absorption rates and activity-driver costs, setting prices and evaluating costing methods.
How to study A-level Accounting
Build each solution in a fixed order: identify the accounting relationship, record or calculate methodically, reconcile the result, then interpret it for the relevant decision and stakeholder.
Core concepts
Concept 1
Absorption costing assigns direct costs and a share of production overhead to products using appropriate bases.
Exam cue: Separate allocation, apportionment and absorption steps.
Concept 2
Activity based costing groups overhead into cost pools and applies cost drivers that reflect resource consumption.
Exam cue: Match each overhead pool with a cost driver that explains the activity causing cost.
Concept 3
Method choice can materially affect product costs, pricing and decisions, especially when overhead is high and products are diverse.
Exam cue: Compare methods by tracing why product costs change, not merely which total is higher.
Risk pitfalls and guardrails
Using one arbitrary volume base for every overhead without evaluation.
Guardrail: Do not select a familiar formula or entry until you have classified the accounts, period, user and decision named in the task.
Treating an overhead absorption rate as a cash cost per unit.
Guardrail: Do not select a familiar formula or entry until you have classified the accounts, period, user and decision named in the task.
Assuming ABC is always worth its data and implementation cost.
Guardrail: Do not select a familiar formula or entry until you have classified the accounts, period, user and decision named in the task.
Memory anchors
Allocation
Allocation assigns a whole cost directly to one cost centre.
Apportionment
Apportionment shares a common cost across cost centres using a reasonable basis.
Absorption
Absorption charges overhead from cost centres to units of output.
Overhead Absorption Rate
An overhead absorption rate relates budgeted overhead to a chosen activity base.
Cost Pool
An ABC cost pool groups overhead associated with an activity.
Cost Driver
A cost driver is the measure used to assign an activity's cost to products or services.
Checkpoint rule
Do the check-up only after you can summarize each concept in one sentence and identify one dangerous pitfall from memory.
Knowledge Check (after reading)
Short check-up to confirm understanding of this module.
Check-up Questions
What is overhead allocation?
What is overhead apportionment?
Answer all questions to submit.
Next step personalized recommendations
Continue learning
Move forward only after this module is stable.
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