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Dear John,
Will it be possible that you explain me the key differences between absorption costing and activity based costing, because honestly it’s not clear for me. On the other hand, is the over/under absorbed overhead involved in the calculation of the activity based costing, as it is in the absorption costing. Thank you a lot for the clarification!
Cheers!
Miguel
the major difference both methods of costing is the way cost is being apportioned;
For absorption costing, costs are divided into direct material/direct labour and overheads
while for activity based costing costs are split up into direct material/direct labour/cost drivers, the trick is the cost drivers are basically items that drive the cost of a product, it can be in the form of production runs, deliveries, component supply, etc.D.O.A.: Please don’t answer in this forum – it is Ask the Tutor, and you are not the tutor 🙂
Miguel: ABC is absorption costing, but differs from traditional absorption costing. Traditional absorption absorbs all the overheads on the same basis (usually either labour hours or machine hours) whereas ABC looks at why different overheads are being incurred and absorbs each category of overhead in the most sensible way (i,e, on the basis of what is causing the overhead).
The free lecture on ABC explains this.
With regard to over/under absorption of overheads, it could still be relevant for ABC, but this is not relevant for the exam. The purpose is to get more accurate costings (for the purpose, for example, of deciding on a selling price for each product.
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