ABSORPTION COSTING

Submitted by: Deepak Sharma Rashmi Garg John Gamit Submitted To: Prof. Varun Dingra

Agenda
Meaning

of absorption costing (Marginal Vs Absorption

Comparison

Costing)

Merits

and Demerits

Meaning

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 labor, and both variable and fixed manufacturing overhead. As a result, absorption costing is also referred to as full costing or the full absorption method Absorption costing is often contrasted with variable costing Marginal costing is also termed as variable costing, a technique of costing which includes only variable manufacturing costs , in the form of direct materials, direct labour, and variable manufacturing overheads while determining the cost per unit of a product.

Marginal Vs Absorption

Specimen Format : Absorption Costing

Specimen Format : Marginal Costing

Merits
It

recognizes the importance of fixed costs in production This method is accepted by Inland Revenue as stock is not undervalued This method is always used to prepare financial accounts When production remains constant but sales fluctuate absorption costing will show less fluctuation in net profit and Unlike marginal costing where fixed costs are agreed to change into variable cost, it is cost into the stock value hence distorting stock valuation

Demerits
As

absorption costing emphasized on total cost namely both variable and fixed, it is not so useful for management to use to make decision, planning and control as the managers emphasis is on total cost, the cost volume profit relationship is ignored. The manager needs to use his intuition to make the decision