Traditional absorption costing

In this lesson

1. 0:00 Cost management and value creation
2. 1:20 Understanding Absorption Costing basics
3. 2:24 Calculating overhead absorption rates
4. 4:44 Machine intensive vs labour intensive departments
5. 6:33 Absorbing overheads into products
6. 8:03 Working example: Product X overhead absorption
7. 11:02 Over and under absorption explained
8. 13:55 Calculating over absorption adjustments
9. 15:32 Absorption Costing recap and key takeaways

About this lesson

This video covers the three core skills you need: calculating overhead absorption rates for machine-intensive or labour-intensive departments, absorbing overheads into cost units to estimate product costs, and identifying over or under absorption to reconcile budgeted versus actual overheads. These techniques are essential for Performance Management and Management Accounting papers, helping you set accurate prices and plan budgets effectively. The session starts by explaining why absorption costing matters in modern cost management. You'll discover how to determine whether a department is machine-intensive or labour-intensive, then calculate the overhead absorption rate by dividing budgeted overheads by the appropriate activity level—either machine hours or labour hours. Through worked examples, you'll see how to apply these rates to individual products, building up a realistic full production cost by combining direct materials, direct labour, and absorbed overhead per unit. The final section tackles a common real-world scenario: comparing what you estimated at the period start against what actually happened. You'll learn how to calculate overhead absorption by multiplying actual hours worked by the absorption rate, then compare this to actual overheads incurred to identify any over or under absorption. This reconciliation process ensures your management accounts stay accurate and highlights adjustments needed to reflect reality. By the end, you'll be confident applying absorption costing in exam questions and understanding why this straightforward approach remains valuable for production planning and pricing decisions.

Duration: 17m