Formula Sheet Absorption Costing*

Process costing:

Overhead cost/unit = total overhead costs / total number of units produced

Total cost/unit = direct labor/unit + direct material/unit + overhead/unit

Job-order costing:

Overhead rate = total overhead costs / total number of units of cost driver used (by all jobs!)

Overhead cost of job = overhead rate * number of units of cost driver used by job

Total cost of job = direct labor of job + direct material of job + overhead costs of job

Job-order costing with over-and under-absorbed overhead costs:

Prospective overhead rate = expected annual overhead costs / expected annual activity level

Absorbed overhead costs = prospective overhead rate * actual amount of cost driver used by the
job

Total cost of job = direct labor of job + direct material of job + absorbed overhead costs

Total absorbed overhead costs = prospective overhead rate * actual activity level

Over-absorbed OH costs = total absorbed overhead costs - actual overhead costs (when total
absorbed OH costs > actual OH costs)

Under-absorbed OH costs = actual overhead costs – total absorbed overhead costs (when total
absorbed OH costs < actual OH costs)

Dealing with over-absorbed overhead costs:

Option 1: Writing off:

Cost of goods sold – over-absorbed overhead costs

Option 2: Prorating

Cost of goods sold – proportion of over-absorbed overhead costs

Inventory accounts – proportion of over-absorbed overhead costs

* Formulas will not be provided on the exam because formulas can be easily reproduced if students
understand the theory.
ACC 333 (De Meyst)

Dealing with under-absorbed overhead costs:

Option 1: Writing off

Cost of goods sold + over-absorbed overhead costs

Option 2: Prorating

Cost of goods sold + proportion of over-absorbed overhead costs

Inventory accounts + proportion of over-absorbed overhead costs

The denominator problem

Calculating prospective overhead rate when using expected annual activity level

Prospective overhead rate = expected annual overhead costs / expected annual activity level

Calculating prospective overhead rate when using normal activity level

Prospective overhead rate = expected annual overhead costs / normal activity level

(with ‘normal activity level’ = average amount of cost driver used in the past years)