bsorption

Costing

Fy-bms ‘A’divGroup -3Presents

Absorption costing uses the total direct costs and overhead costs

associated with manufacturing a product as the cost base.

MEANING

ACCORDING TO INVESTOPEDIASome of the direct costs

associated with manufacturing a product include wages for

workers physically manufacturing a

product, the raw materials used in producing a product, and all of the overhead costs, such as all utility costs, used

in producing a good.

Types Of Absorption

Costing

Job Order

Costing

Process Costing

ABC Costing

Record all costs.

Classify all the costs.

Direct cost are directly linked to the out put

Allocate the Indirect costs to the service departments of a business.

Reallocate costs form support departments to production departments.

Calculate an overhead recovery rate.

Absorb both the direct and indirect costs (overheads) into individual

products.

STEPS IN ABSORPTION COSTING

ADVANTAGES OF ABSORPTION

COSTING Fixed costs are recovered-fixed costs are incurred in order to make output to make output so it is only fair to charge all output with a share of these costs.

Ensures that costs are fully recovered.

Encourages costs consciousness.

It is fair in that it uses appropriate methods for each overhead.

Identifies total costs- this is useful where pricing is on a cost plus basis.

Identifies the profitability of different products and services.

DISADVANTAGES OF ABSORPTION

COSTING All methods are arbitrary- no method of diving up fixed costs is satisfactory.

Absorption cost is true only at the level of activity at which it was calculated.

Danger of under or over absorption of overheads.

Complex, time consuming and expensive.

Potentially misleading guide to profitability of products.

The capacity levels chosen for overhead absorption rates are based on historical information and are open to debate.

OVER AND UNDER ABSORPTION

• Absorption rates are based on budgeted or pre-determined

figures.• If output/sales are different form those budgeted then the

result is :

•Over load absorption- Absorbed overheads are greater than

actual overheads.

• Under load absorption- Absorbed overheads are less

than actual overheads.

• Absorption costing is powerful and widely used tool because it tries to

approximate “full” or “normal" cost. However, absorption costing has a

number of weakness.• Recall that units costs can be highly

misleading because unit costs include both fixed and variable costs and fixed costs per unit depend on - Number of units used to

compute the overhead rate - Number of units Produced vs. number sold

CRITICISM

To stop this one may : - Have corporate policies on how

much inventory can be carried… - Impose a cost capital charge on

inventories so manufacturing managers “see” the overproduction cost “right" cost of capital is hard to

ascertain. - Managers stock option… used to

appear more intelligent solution that it does now with market down and out… even in good times, incentives effect is

small.

CRITICISM

Absorption

costin

g

Fixed manufacturing overheads are treated as product costing. It is believed that products cannot be produced without the resources provided by fixed manufacturing overheads

Marginal costin

g

Fixed manufacturing overhead are treated as period costs. It is believed that only the variable costs are relevant to decision-making.Fixed manufacturing overheads will be incurred regardless there is production or not

Difference between absorption and marginal costing

Absorption

costin

g

High value of closing stock will be obtained as some factory overheads are included as product costs and carried forward as closing stock

Marginal costin

g

Lower value of closing stock that included the variable cost only

Difference between absorption and marginal costing

Absorption Rates• Calculated by taking the overhead for a particular cost center and dividing it by number of units of the absorption

base. Knowing your area's Absorption Rate, helps to track

trends.  Understanding the market and where it is headed is part of our job as real estate professionals.Absorption rate is NOT an exact science.  Figuring it is

based on the premise that one will be looking for a TREND.  It is advised to consistently do the numbers each

month, to be able to track a trend.Getting Starting...

You need to know 2 figures.1) How many listings are currently on the market?

2) How many listings sold last month?You will be counting under-contract or pending as listings,

since they are not SOLD yet.Multiple the number of sold last month by 12 (months).

Divided by the current listings equals # of Units that would sell each week.

Divide the # or units that should sell each week into the number available = absorption rate.

Absorption Rates

Cost Unit Absorption Rate

= Production cost center

overhead Number of cost units

Direct labor hour absorption rate

= Production cost center

overheads

Number of labor hours

Machine hour overhead absorption rate

= Production cost center

overheads Number of machine hours

Direct wage percentage overhead absorption rate

= Production cost center

overheads x 100

Direct wages

A Team Work By:-

02.Shabbir Masalawala16.Husain PainterHafsha Farookh

52.Khadija Patanwala