Creative Product Promotion 1 of 2

BTEC Extended Diploma in Business

Level 3

Management Accounting

Unit 7 CREDIT 10

1 of 2

Contents Page

Tasks Pages

Task 1

A

Explain two methods that compnay uses to to cost a product

B

Task 2

A

Evaluate the break even analysis

Task 1

A

The two methods that organisation uses to cost a product and determine it’s at any given level are Absorption cost and Margin cost.

Absorption costing

Absorption costing means that all of the manufacturing costs are absorbed by the units produced. In other words the cost of a finished unit in inventory will include direct materials, direct labour, and both variable and fixed manufacturing overhead. As a result, absorption costing is also referred to as full costing or the full absorption method.

On the other hand absorption costing is often contrasted with variable costing or direct costing. Under variable or direct costing, the fixed manufacturing overhead costs are not allocated or assigned to the products manufactured. Variable costing is often useful for management’s decision-making. However, absorption costing is required for external financial reporting and for income tax reporting.

Also absorption cost is a method for appraising or valuing an organisation’s total inventory by including all the manufacturing costs incurred to produce those goods. Absorption costing is different from all the other costing methods because it takes into account fixed manufacturing overhead which includes expenses such as factory rent, utilities etc.

It is hard to factor in the fixed manufacturing overhead expenses into calculating the per unit price of goods, therefore other methods such as Variable Costing do not take it into account. One drawback of absorption costing is that managers can increase production levels without