ACC 406 Lecture Notes - Lecture 3: Pro Rata, Total Absorption Costing, Voh

• School: Ryerson University
• Department: Accounting
• Course: ACC 406
• Professor: Anthony Chan

Document Summary

Absorption costing vs variable costing: absorption costing: Fixed overhead is included as product cost and apply to/absorbed by product unit. Cost of goods manufactured = dm + dl + total overhead (voh and foh: variable costing. Fixed overhead is excluded from product cost, and expensed in the accounting period. Cost of goods manufactured = dm + dl + voh. Absorption costing: actual absorption costing method, actual overhead rate = actual overhead cost / actual activity volume, normal absorption costing method (predetermined) estimated overhead rate = expected overhead cost / expected activity volume. 2 reasons why normal absorption is more commonly used than actual absorption: actual information is not possible to get all the time, actual information is not timely (too late); company have to do planning for future. Oh applied to job 1 = predetermined oh * actual volume for job 1. Actual absorption contains accounting qualities: objectivity; reliability; verifiability. Normal absorption contains accounting qualities: relevance; decision making usefulness; timeliness.