Absorption Costing Assignment Help

Definition of Absorption Costing

Absorption costing is a cost accounting method of calculating the cost of the product which is manufactured. It includes cost of direct material, direct labour, Fixed and Variable overheads. Under Absorption Costing, Cost of manufacturing includes fixed as well as variable costs.Thus, Valuation of inventory would include all types of cost that are used in the process of production. Courseworktutors provide Absorption Costing Assignment Help on all topics of Absorption Costing.

Importance of Absorption Costing

  • Absorption Costing helps in ascertaining the exact price of the cost of the product which is really helpful while calculating the profit/Loss of an entity.
  • Absorption Costing is the best method for the valuation of Inventory.

What all Cost would be included in the Cost of Product?

Cost of the product under Absorption Costing would include

  • Direct Materials
  • Direct Labour
  • Fixed Manufacturing Overhead
  • Variable Manufacturing Overhead
  • Selling and Administrative cost are not the cost associated with the production of goods. They are incurred solely for the purpose of selling the goods. Thus, it will not be included in the Calculation of Cost of product under absorption costing.

Advantages of Absorption Costing

External Reporting Purpose
Absorption Costing helps in valuing the stock which is very useful for the Management in preparing Financial Statement. This financial Statements are used for the purpose of external reporting to Shareholders.

Helps in Calculating Accurate Profit
As Absorption Costing includes both Fixed as well as Variable Costs, it helps in calculating true profit per unit since all types of overhead cost are part of product cost.

Disadvantages of Absorption Costing

Inclusion of Fixed Costs :

Fixed Cost are unavoidable cost. This cost are something which will be there even if the unit is not working. Including it in the cost of the product affects the profit motive objective.

Difference between Absorption Costing and Variable Costing

 

Absorption Costing

 

Variable Costing
 

Cost of Product includes all types of Cost incurred in the production of goods.

 

 

Cost of the Product includes only direct materials , direct costs , direct labour and variable overheads.

 Valuation of Inventory would be high as it includes all cost. Valuation of inventory would be less as compared to absorption costing.
Absorption Costing includes fixed manufacturing overhead cost in the calculation of cost of product. Fixed manufacturing overhead cost is not included in the calculation of cost of product as it is considered as a period cost under variable costing.
Product Cost is always higher. Product cost is less compared to Absorption Costing.

 

Example of cost of Product under Variable and Absorption Costing

Particulars  Absorption Costing                     

 Variable Costing

 

 

Direct Material

 

$20  

$40

 

Direct Labour $12 $17
Variable Manufacturing Overhead $10 $17
Fixed Manufacturing Overhead $25
Variable Marketing and Administrative Expenses
Total $67 $74

 

Marketing and Selling Costs are the cost which are not incurred with respect to the production of goods and hence it will not be included either in Absorption Costing or Variable Costing while calculating the Cost of Product.

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