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Absorption Costing Script

This document discusses absorption costing and its components. Absorption costing is a managerial accounting method that captures all costs associated with manufacturing a product, including direct costs and an allocation of fixed overhead costs. Direct costs such as materials and labor can be traced directly to a product, while indirect costs like utilities are allocated based on measures like units produced. The formula for absorption costing calculates the total cost per unit by dividing all direct and allocated indirect costs by the number of units produced. In contrast, variable costing only includes direct costs in the unit cost and expenses indirect costs separately, making it useful for management decision making.

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Regine Nanit
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41 views

Absorption Costing Script

This document discusses absorption costing and its components. Absorption costing is a managerial accounting method that captures all costs associated with manufacturing a product, including direct costs and an allocation of fixed overhead costs. Direct costs such as materials and labor can be traced directly to a product, while indirect costs like utilities are allocated based on measures like units produced. The formula for absorption costing calculates the total cost per unit by dividing all direct and allocated indirect costs by the number of units produced. In contrast, variable costing only includes direct costs in the unit cost and expenses indirect costs separately, making it useful for management decision making.

Uploaded by

Regine Nanit
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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SLIDE 1: INTRODUCTION

 Introduction to Group 4
 Introduction to Members
SLIDE 2
What is Absorption Costing?
 It is a managerial accounting method for capturing all costs associated with manufacturing a
particular product. It is sometimes called “full costing”
 Absorption costing includes anything that is a direct cost in producing a good in its cost base.
 It also includes fixed overhead charges as part of the product costs.
Components of Absorption Costing
 The components of absorption costing include both direct costs and indirect costs.
 Direct costs -are those costs that can be directly traced to a specific product or service. These
costs include raw materials, labor, and any other direct expenses that are incurred in the
production process.
 While Indirect costs are those costs that cannot be directly traced to a specific product or
service. These costs are also known as overhead expenses and include things like utilities, rent,
and insurance. Indirect costs are typically allocated to products or services based on some
measure of activity, such as the number of units produced or the number of direct labor hours
required to produce the product.

SLIDE 3
 The formula for absorption costing can be written as follows:
Absorption cost = (Direct labor costs + Direct material costs + Variable manufacturing
overhead costs + Fixed manufacturing overhead) / Number of units produced.
 This means that the cost of each unit of a product includes not only the direct costs of producing
that unit, but also a portion of the indirect costs that were incurred in the production process. The
total manufacturing costs are then divided by the number of units produced to determine the
cost of each unit.

SLIDE 4
 Now let’s differentiate ABSORPTION COSTING & VARIABLE COSTING
 Absorption costing and variable costing are two different methods of costing that are used to
calculate the cost of a product or service. While both methods are used to calculate the cost of a
product, they differ in the types of costs that are included and the purposes for which they are
used.
 Under Absorption costing, all manufacturing costs, both direct and indirect, are included in the
cost of a product. This means that the cost of each unit of a product includes not only the direct
costs of producing that unit, such as raw materials and labor, but also a portion of the indirect
costs that were incurred in the production process, such as overhead expenses
 Variable costing, on the other hand, only includes direct costs in the cost of a product. Indirect
costs, or overhead expenses, are not included in the cost of the product under variable costing.
Instead, they are treated as a period expense and are recorded in the income statement in the
period in which they are incurred. Variable costing is typically used for management decision-
making and planning purposes, as it provides a more accurate representation of the incremental
costs associated with producing an additional unit of a product.

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