Absorption Costing

Absorption costing and variable costing

Absorption costing

AC-all of the manufacturing costs r absorbed by the units prodcd. i.e the cst of a finshd unit in invntry wil inc. dirct matrls, dirct labor, and bth variable & fxed manfactering ovahed. Aka ful costing/ful absorption methd. Fxd/variable cst is treated as prduct cost wen usin AC technique.

The reasn AC is usd is cos of 2 key fctrs: Inventry valuatns – clsing inventry is inc.d. un the SFP,cst of sles is inc.d. in SFP & g.prof. is affctd by the way thes r calcultd. And Pricing descisions – many corporations use ful cst as the bsis 4 calclatin ther sellng prics.

Advantages:

+all fxd prodctin csts inc., inventry is valued in accrdnce wit IAS, usefl 4 cost plus prcing, alwys usd to prepre financial accnts.

Disadvantages:

-depnds on accry of forecast, fxd prodctn ovaheds carid 4wrd in stck, pricing shuld b markt basd, arbitrary.

Variable costing

VC r anotha frm of prdct cstin. Csts of prodctn dat vary wit output are treatd as prodct csts. Tis inc. drct matrls, drct labour & the vriable prtion of manufacterin overhead. Aka direct/marginal costin.

Advctes of VC argue dat the fxd csts r actually sunk costs. This is cos the csts dnt change wit chnges of outpt thus they r nt relvant wen mekin decsns bout the amount of outpt quntaties tht r prodcd.

Advantages:

+varble cstin meks it esier 2 estimate the profitability of prdcts & customaz; Cstin prof is clsa 2 net csh flw than absrptn cstin prof. Tis concerns compnies havin csh flw probs.

Methods

Mthds-Unt of outpt m=totl fxed prodtn ovahed/no. of cst unts prdcd. % of drct cst m=totl fxd prodtn ovahed/prime cst of unts prod. Drct labr hr m=totl fxed prodtn ovahed/no. of drct labr hrs. Machine hr m=totl fxed prodtn ovahed/no. of mach. hrs.

Comparison of absorption and variable costing

AC is betta…

AC-all of the manufacturing costs r absorbed by the units prodcd. i.e the cst of a finshd unit in invntry wil inc. dirct matrls, dirct labor, and bth...