Absorption Costing

Read Complete Research Material

ABSORPTION COSTING

Cost Control and Performance Management



Cost Control and Performance Management

Introduction

Absorption costing is basically defined as all the costs of manufacturing that are absorbed and included in all the produced units. In short, it is regarded as the cost of a finished unit in the overall inventory and is comprised of all the direct labour, direct materials, and manufacturing overhead that is both fixed and variable. Consequently, absorption costing is also regarded as the method of full absorption of full costing. The current time period of the competition of world and the emerging technologies as well as different kinds of latest information systems is showing a way to the companies towards an excellence in the sectors of manufacturing. In order to increase the attention of the orientations of new products into the markets, the processes and the quality of products, inventory levels, improvement of policies regarding employees have assisted the businesses in expanding them globally.

Discussion

Some absolute information regarding cost of the manufactured product is crucial in each perspective of any business, from all the policies of pricing to its overall designing and performances of the product. Thus, a lot of companies are yet to be use the similar kind of old systems of cost accounting that were established prior to several decades (Cooper & Kaplan, 1998, p. 8). Absorption costing is mostly distinguished with the direct costing or costing. Under direct or variable costing, the costs of manufacturing overheads that are fixed in nature are not assigned and allocated for manufacturing the products. In the management of decision making the mist useful is the variable costing. However, for some reporting of the income taxes and for the purpose of financial reporting, absorption costing is essential.

As, the absorption costing needs the proper allocation of whatever can be considered as amount of the products in the form of overhead costs, a huge part of the costs of the product cannot be straight perceptible to the products. The overhead costs to any product do not always allocated by the direct costing and it can be more advantageous than the processing of absorption costing as it requires for incrementing the decisions regarding price of the product where everyone is highly concerned with just the costing that is necessary for manufacturing the upcoming incremental product unit.

It is probable too that anybody could be able for generating some marginal profits directly by producing more purchasable items especially that it is incapable to sell. This circumstances rises since the manufacturing overheads of the fixed type are not required by the absorption costing and it is essential to do allocations of entire number of units manufactured. If few units of those are not sold consequently then the costs of the fixed overhead are not allocated to the surplus units which are in no way indicted to expense, by this means it leads to higher profit margins eventually. A costing manager could mistakenly authorize the surplus of production for creating such surplus profits but it ...
Related Ads