1 Activity based costing

　　1.1 Introduction absorption cost

　　In F2 we saw how to determine a cost per unit for a product. Key issues of relevance here are the following:

　　Firms have the choice of two basic costing methods marginal costing and absorption costing.

　　To enable this, all overheads must first be allocated/apportioned/reapportioned into production departments, again using a suitable basis (e.g. rent on the basis of floor area).

　　Overhead expenses incurred/budgeted

　　Step 1: Overheads allocated or apportioned to cost centres using suitable bases Cost centres (usually departments)

　　Step 2: Service centre costs reapportioned to production centres

　　Step 3: Overheads absorbed into units of production using an OAR (usually on the basis of direct labour hours) output