Absorption costing

In this lesson

1. 0:00 Introduction to Absorption Costing
2. 1:09 Breaking down the factory into cost centres
3. 2:32 Allocating and apportioning overheads
4. 4:09 Production versus service cost centres
5. 5:55 Worked example: allocation and apportionment
6. 10:04 Reapportionment using the step down method
7. 20:42 Summary of allocation, apportionment, reapportionment
8. 22:04 Alternative reapportionment methods explained

About this lesson

You'll work through a three-step process—allocation, apportionment, and reapportionment—to distribute overheads from production and service cost centres to the units you produce. This is essential knowledge for your Performance Management or Management Accounting exams, where you'll need to handle overhead absorption rates and calculate the true cost of production. The lesson walks you through allocation first, where you assign overheads that relate directly to specific departments—like supervisors' wages to their own department. Next comes apportionment, where you share common overheads like rent and utilities across all departments using fair bases such as floor space or electricity usage. The trickier part is reapportionment, where you eliminate service cost centre overheads (like canteen or stores) by redistributing them to production departments where actual output occurs. You'll see a worked example showing how to use the step-down method, the most common approach in exams, plus brief coverage of direct and reciprocal methods for different scenarios. By the end, you'll understand how to track overheads through each stage and verify your work by checking that total costs remain constant. While this lesson focuses on the apportionment stages, it sets you up perfectly for the next step: calculating overhead absorption rates and charging costs into individual units of production.

Duration: 24m