ABSORPTION COSTING

Absorption Costing

Absorption Costing

Merits Of The Absorption Method Of Costing

Absorption costing is the method to evaluate and assess the company's total inventory by including all production costs incurred to produce those goods. Absorption costing is different from other costing methods, as it takes into account fixed manufacturing overhead costs (including expenses such as rent of factory services amortization). It is difficult to take into account fixed manufacturing overhead in calculating unit price of goods, so other methods such as variable costs do not take into account. Some of most common benefits of absorption costing are:

• Recognize importance of fixed costs of production;

• This method is accepted by tax and securities are not undervalued;

• This method is always used to prepare financial accounts;

• When production remains constant, but sales fluctuate absorption costing are less fluctuations in net earnings and

• Unlike marginal costs where fixed costs are agreed to change in variable cost, which is cost in value of shares thus stock valuation of distortion.

Absorption costing means that all manufacturing costs are absorbed by units produced. In other words, cost of the finisher in inventory includes direct materials, direct labor, and both variables and fixed manufacturing overhead. As the result, absorption costing is also known as full cost or full absorption method.

Absorption costing is often contrasted with variable costing or direct costing. Under variable or direct costing, fixed manufacturing costs are not allocated above or assigned to (not absorbed by) manufactured products. Variable costing is often useful for management decision making. However, absorption costing is required for external financial reporting and reporting on income.

Direct materials, direct labor / labor and direct expenses that are part of prime cost are all direct costs. They can be assigned (attributed) to manufacture of the product directly. Costs beyond cost of production are called overhead. These costs are not directly attributable to products or services or cost centers. They are given by mapping process and apportioning overhead costs, distribution is based on the rational rationale.

In calculating cost of product / service, the technique considers marginal cost of behavioral costs (segregation of costs into fixed and variable elements) as the variable unit cost is fixed and total costs are variables in nature, where total fixed costs are fixed and fixed cost per unit is variable in nature and, in addition, variable costs are controllable in nature, while total fixed costs are uncontrollable in nature. Marginal costs is useful for short-term planning, control and decision making, especially in the business where many products are produced. In technique of marginal costs, contribution is calculated after deducting variable costs of sales value for each product or service, in order to calculate total contribution of all products / services made to costs Total fixed incurred by company. As fixed costs are treated as period costs will be deducted from total contribution to arrive at net profit.

In context of calculating cost of the product / service, absorption costing considered the part of any expenses incurred by the company for each of your products ...