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Hello teacher and everyone in the forum!
I plan to take F5 examination in this Dec. I have a question in absorption costing relating to treatment with variable and fixed cost as follow:
– As i understand, with overhead cost which can be traced directly and fully to product/ service so they must be absorbed to each product/ service benefit from them. And, obviously overhead cost includes both direct and indirect cost. So that it is correct for us to using absorption rate to all variable and fixed overhead cost?
– From above point, in my opinion: with variable cost, it varies to the level of activity so that will never derive under or over absorption cost. Reversly, with fixed cost, it can not vary to the level of activity, therefore, it apprarently incur under or over absorption cost ?
– One more aspect: as i infered from Bpp example, if examiner does not indicated anything about actual overhead cost or changing in investing level etc..which can tell us about level of fixed overhead, then we must treat actual overhead cost is the as budgeted amount, no change ?I self-studying, so it is important to understand carefully so please help me! I am thank you in advance for your help!
Overheads may be variable and fixed and they can vary with the level of activity (company maybe needs more warehouses; every batch of units produced requires certain amount of electricity, etc). And using absorption costing you need to absorb all fixed overheads accourting to some absorption rate (base on labour hours, or machine hours or something else).
Thank you so much for your reply to me!
as you said :” Overheads may be variable and fixed and they can vary with the level of activity “. This is a truth, but under ABC and absorption costing, it is assumed in short-run that total Fixed costs are constant. And unit variable cost also be consider to be unchange in assumed range. Therefore i think that they are assuming that business is in shorterm condition.
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