![]() There are advantages and disadvantages of absorption costing: Advantages The absorption rate worked out is used to calculate the total overheads of a product.įrom all these three stages only allocation is used in ABC. Stage two works out the absorption rates that are then used to charge overheads to cost objects. Service department overheads are transferred to the production department so they can be covered. Cost apportionment is a process of charging indirect costs to cost centres that can’t be directly allocated. This process deals with overheads that can be directly assigned to cost centres without the need to be apportioned. Allocation is the process of estimating the cost of resources consumed by a product that does not use direct measures. ![]() Stage one considering the allocation and apportionment of indirect costs to service and production cost centres and then apportionment of the service department to production department. Working out absorption costing involves a two stage process. This company currently operates under absorption costing system for working out overheads for their services. During the time this system was developed there were mostly industrial companies which made this system suitable to assign costs to cost objects. This costing system was developed decades ago when companies were much smaller and had less overhead costs. The other definitions are also good as they state some processes involved in absorption but Cima puts the definition in a more understandable way. “Absorption costing is a system in which all the fixed manufacturing overheads are allocated to the products.” Druryįrom all these definitions the Cima definition is the better definition because it mentions most of the key processes that are involved in absorption costing which straight away gives you an idea of what absorption costing is. “Absorption costing systems is a costing system where manufacturing costs are allocated to products and non manufacturing costs are not allocated to the product but charged directly to the profit statement and excluded from the inventory.” Drury (2008) “Absorption costing is a method of costing that, in addition to direct costs, assigns all, or a proportion of product overhead costs units by means of one or a number of overhead absorption rates.” Cima (2005)
0 Comments
Leave a Reply.AuthorWrite something about yourself. No need to be fancy, just an overview. ArchivesCategories |