Absorption Costing

Absorption Costing -Overview

1. Overview of Absorption costing and Variable Costing

2. Review how costs for Manufacturing are transferred to the product

3. Job Order Vs. Process Costing

4. Overhead Application -Under applied Overhead -Over applied overhead

5. Problems with Absorption Costing

6. Concluding Comments

Absorption Costing

The focus of this class is on how to allocate manufacturing costs to the product.

-Direct Materials
-Direct Labor
-Overhead

Absorption costing is a process of tracing the variable costs of production and the fixed costs of production to the product.

Variable Costing traces only the variable costs of production to the product and the fixed costs of production are treated as period expenses.
Absorption Costing

There are three different types of Absorption Costing Systems:

-Job Order Costing
-Process Costing
-ABC Costing

In Job Order Costing costs are assigned to the product in Batches or lots. –
For example,
-Printing -Furniture manufacturing -Bicycle Manufacturing

In Process Costing, costs are systematically assigned to the product, since there are no discreet batches to assign costs.

-Oil Distilling -Soda Manufacturing

ABC Costing assigns cost from cost centers to the product

-Best in a multi product firm, where there are different volumes
Absorption Costing

A simplified view of Production:

Introduce Raw Materials Manufacture Product Store finished goods Sell Finished Goods
1. Direct materials
2. Direct labor
3. Production process are purchased applied to completed
4 Direct materials product
5. Goods are shipped are placed into
6. Overhead costs for sale production are incurred

Absorption Costing

How do we account for the production process?

1. Direct materials are purchased and recorded as an asset.

2. As direct materials are placed into production, their cost is transferred from the raw materials account to the Work-in-Process account (an asset)