Cambrige AS and A Level Accounting Notes (9706)/ ZIMSECĀ  Advanced Accounting Level Notes: Absorption of Overheads: One Product Worked Example

The Example

Fantastic Furniture Pvt Ltd produces desks. Each desk uses 3 kg of wood at a cost of $4 per kg, and takes 4 hours to produce. Labour is paid at the rate of $2 per hour. Fixed costs of production are estimated to be $700,000 p.a..
The company expects to produce 50,000 desks p.a.

Required:

  1. Calculate the total cost per each desk

Solution

Cost ElementCost Per Unit
$
Materials (3kgx$4)12
Labour (4hrsx$2)8
Overheads($700 000/50 000)14
Total cost per unit

34

NB

  • This is a straight forward example there is no need for an overhead analysis sheet here
  • Under Absorption Costing each unit of production has to “absorb” its portion of fixed costs
  • Since there is only one product and one department we can simply divide the total overheads by the number of units we expect to produce
  • \dfrac{\text{700 000}}{\text{50 000}}

To access more topics go the ZIMSEC Advanced Level Accounting page

To access more topics go to the Cambridge AS/A level page


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