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Introduction

Absorption costing Cheap Justin Braun Jersey , also known as full costing, is a costing technique in which all manufacturing costs, variable and fixed, are considered as costs of production and are used in determining the cost of goods manufactured and inventories. All manufacturing costs are fully absorbed into finished goods.

Significance of Absorption

Significance of absorption costing are as follows:

• Under this technique Cheap Chris Tierney Jersey , both fixed as well as variable costs are allocated to the cost unit.
• Under it, the overhead costs are allocated to cost unit with the help of the overhead absorption rate.
• Under it, the closing inventories are also valued at both fixed as well as variable cost.
• Under this technique, the periodic profit is affected by a change in the inventory as well as in the volume of sales.
• Under it Cheap Tomas Hertl Jersey , the profit becomes a function of production instead of sales.

Advantages & Disadvantages of Absorption Costing

Absorption costing techniques has the following advantages:

• It recognizes the importance of incorporating the fixed cost into the unit cost of production.
• Unit price as determined under absorption costing technique ensures that all costs are included in it.
• It reduces the work-burden of segregation of cost into fixed and variable parts.
• It confirms the accrual concepts by matching the costs with the revenue for a particular period.
• Under this costing technique, the inventory can be valued at the total cost.
• Identification of an effective utilization of production resources is possible by application of absorption costing.
• It helps to calculate gross profit and net profit separately in the income statement for an accounting period.

In spite of having a number of important advantages, absorption costing technique suffers from the following limitations:

• It can be effectively used only at a constant level of output to get a uniform unit cost. Under his technique, unit costs would be different for different levels of output.
• As the unit costs as determined by this technique under different levels of output are different Cheap Martin Jones Jersey , the process of cost comparison and cost control becomes difficult.
• In absorption costing, a portion of fixed cost is carried forward to the next accounting period as the closing inventory is valued at the total cost which includes a proportionate fixed cost.
• Most of the accountants opine that fixed costs are period costs and they do not produce future benefits of the concerns and hence, should not be included in the unit cost of production.
• Under this costing technique, a portion of fixed cost is not charged against the revenue of the period in which they are incurred due to the inclusion of fixed cost in the closing inventory.
• Absorption cost deals with production cost alone and ignores administration Cheap Joonas Donskoi Jersey , selling and distribution costs.
• It is not helpful for managerial decision making process, such as selection of suitable product mix, temporary shutdown of plant, suspension of production activity if required or not Cheap Joe Pavelski Jersey , choice between various alternatives or pricing decision When You Need Online High School Courses Ontario Offers Plenty Of Opportunities When You Need Online High School Courses Ontario Offers Plenty Of Opportunities October 19, 2013 | Author: Rhea Solomon | Posted in Education
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