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Due to recent improvements in supplier reliability, BF is re-examining its inventory holding policies and recalculating economic order quantities (EOQ). ● Item “Z” costs BF £1000 per unit ● Expected annual production usage is 65,000 units ● Procurement costs (cost of placing and processing one order) are £2500 ● The cost of holding one unit for one year has been calculated as £300 The supplier of item “Z” has informed BF that if the order was 2,000 units or more at one time, a 2% discount would be given on the price of the goods.

3. What is a systematic approach in charging overheads to products and services? 4. What is allocation and apportionment and how to apportion overheads to production and service cost centres using an appropriate basis? 5. How to re-apportion service centre costs to production cost centres using: ● Elimination method ● Repeated distribution ● Algebraic method (simultaneous equations). 6. What is an Overhead Absorption Rate and how to calculate the appropriate overhead absorption rates for each cost centre.

Because of this we need to calculate how much overhead has been absorbed into our production, compare this with the actual amount and make an adjustment to our P&L account. If we have absorbed too much (over absorption) we will have to add back the difference into our P&L. This will increase the reported profit. If we have not absorbed enough (under absorption) we will have to take more out of our P&L. This will decrease the reported profit. Under or over absorbed overhead is calculated using: £ Absorbed overhead (actual activity x OAR) Actual Overhead Under/over absorption: Exercise 7 Under/Over absorption Aurricula Ltd use absorption costing.