Absorption Costing

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Absorption Costing is an accounting cost method which entails the complete cost of manufacturing or providing a service. It includes not just the cost of labour and materials but also the total manufacturing overheads, either fixed or variable. The cost of each cost center can be direct or indirect and is identified with individual cost centers like accounting, IT, maintenance, etc . Direct cost can be identified with individual cost centers whereas indirect cannot be.

The distribution of overheads among each department is called as apportionment. Apportionment can be done in two methods – the primary distribution of overheads and secondary distribution. In primary distribution, the selection of the base on which the overheads are apportioned depends on service or use basis, survey basis and ability to pay basis. Whereas in secondary apportionment the cost of service departments i.e., apportioned overheads along with the values of direct materials, labour and expenses of the concerned service department are redistributed.

This cost accounting method is often contrasted with variable costing or direct costing. In variable/direct costing the fixed manufacturing overhead costs are not absorbed by the manufactured products but in absorption costing it is absorbed, as the name suggests.
The advantages of absorption costing include identifying the importance of fixed costs involved in production and also shows less fluctuation in net profits especially for firms with constant production but fluctuating sales. Absorption costing is necessary for external financial and income tax reporting.

Rajagiri Center for Business Studies is one of the top business schools in Kochi Kerala offers various post graduation courses like MBA, IMBA, MHRM and PGDM. With an amazing learning environment, best in class hostel facilities, top placement assistance and many more, Rajagiri Business School Cochin, the top b schools in Kerala promising you a better career and bright future. So if you wish to do MBA or PGDM in Kerala then RCBS, top b schools in Kochi is the right choice for you.  

To Know More  https://rcbs.rajagiri.edu/

Location: Kerala, India

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