ABSORPTION COSTING Meaning and
Definition
-
Absorption costing is a method used in managerial accounting to allocate costs to products or services by considering both variable and fixed costs. It is also known as full costing or traditional costing. Absorption costing involves the inclusion of all direct costs (such as direct materials and direct labor) and indirect costs (such as overheads and fixed manufacturing costs) attributed to the production process.
Under absorption costing, fixed costs are considered as part of the cost of production, and are allocated to the units produced based on a predetermined overhead absorption rate. This rate is derived by dividing the total budgeted overheads by the estimated number of units to be produced or the estimated total number of hours of production.
Absorption costing provides a more comprehensive picture of the total costs involved in production, as it spreads both variable and fixed costs across all units produced. This method is primarily used for external reporting purposes, as it complies with generally accepted accounting principles (GAAP) and provides a holistic view of costs for financial statements.
One of the advantages of absorption costing is that it helps determine the actual cost per unit, which is useful in setting prices and making informed decisions about production levels. However, absorption costing has limitations, as fixed costs can be disproportionately allocated to the units produced during periods of low production, resulting in higher reported costs per unit. This can impact the accuracy of cost analysis and decision-making.
Common Misspellings for ABSORPTION COSTING
- zbsorption costing
- sbsorption costing
- wbsorption costing
- qbsorption costing
- avsorption costing
- ansorption costing
- ahsorption costing
- agsorption costing
- abaorption costing
- abzorption costing
- abxorption costing
- abdorption costing
- abeorption costing
- abworption costing
- absirption costing
- abskrption costing
- abslrption costing
- absprption costing
- abs0rption costing
- abs9rption costing
Etymology of ABSORPTION COSTING
The word "absorption costing" originated in the field of accounting.
The term "absorption" comes from the Latin word "absorbere", which means "to swallow up" or "to take in completely". In the context of costing, it refers to the concept of capturing all manufacturing costs, both fixed and variable, and assigning them to the cost of the product being produced.
The word "costing" comes from the verb "to cost", which means to determine the price or value of something. "Costing" refers to the process of calculating the total cost of manufacturing a product or providing a service.
Therefore, "absorption costing" refers to the accounting method that absorbs all production costs, including direct materials, direct labor, and variable and fixed overhead costs, into the cost of a product or service.
Infographic
Add the infographic to your website:
