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Meaning of Absorption Costing:
It is a method of costing by which all the manufacturing costs are absorbed by the units produced. In other words, it is a method of costing a product whereby all fixed and variable manufacturing costs are allocated to defined areas. In calculating this, direct labor, direct expense, direct materials and both variable and fixed manufacturing overhead are taken into account. The main difference between absorption costing and marginal costing is, in marginal costing fixed manufacturing overhead is not added to the product cost. Few points to note down about Absorption costing are:
- This is the only method that is accepted by statutory bodies.
- It is the most popular method for reporting to common investors.
- Absorption costing integrates easily with Financial Accounting.
- It is approved by accounting standards.
Difficulties of Absorption Costing Assignment:
- As the students are not aware of practical situations and do not have experience, they might find it extremely difficult to analyze the problem.
- As it involves detailed and laborious arithmetical calculations, they might find it challenging.
- One has to be mindful about the difference with marginal costing all the time.
- Finer understanding is needed to reconcile between absorption costing and marginal costing stock value and profitability reconciliation.
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