File Name: variable and absorption costing .zip
Managerial Accounting. Absorption costing is the process of linking all production costs to the cost unit to calculate a full cost per unit of inventories. This costing method treats all types of production costs as costs of the product regardless of fixed cost or variance cost. It is sometimes called the full costing method because it includes all types of cost to get a cost unit.
Explain how variable costing differs from absorption costing and compute the unit product cost under each method. Describe how fixed manufacturing overhead costs are deferred in stock and released from stock under absorption costing. Prepare profit and loss accounts using both variable and absorption costing, and reconciled the two profit figures. Explain the effect of changes in production on the profit reported under both variable and absorption costing. Explain the advantages and limitations on both the variable and absorption costing methods. Explain how the use of JIT reduces the differences in profit reported under the variable and absorption costing methods. Two general approach are used for costing products for the purpose of valuing stock and cost of goods sold.
By Diksha Keni. Variable cost is the accounting method in which all the variable production costs are only included in product cost whereas Absorption costing is where all the absorbed costs are taken into account and under this method, all the fixed and variable production costs are deducted and then fixed and variable selling expenses are deducted. Variable costing is defined as an accounting method for production expenses where only variable costs are included in the product cost, whereas, Absorption costing includes all costs associated with a production process that is assigned to the units produced.
The marginal cost of an item is its variable cost. The marginalproduction cost of an item is the sum of its direct materials cost,direct labour cost, direct expenses cost if any and variableproduction overhead cost. So as the volume of production and salesincreases total variable costs rise proportionately. Fixed costs, in contrast are cost that remain unchanged in a time period, regardless of the volume of production and sale. Marginal production cost is the part of the cost of one unit of productor service which would be avoided if that unit were not produced, orwhich would increase if one extra unit were produced.
Absorption costing is a method for accumulating the costs associated with a production process and apportioning them to individual products. Leave a Reply Cancel reply. There are four-step process involved in charging overhead cost to product or services: Overhead Allocation, Overhead Apportionment, Overhead Re-Apportionment and, Overhead absorption Rate also called Overhead Recovery. However, depending on the circumstances of the firm, it can get a little more complicated than this.
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