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this a project made by me and my team for absorption costing
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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