Absorption Costing | Push Digits Chartered Accountants

Absorption Costing

 

Absorption Costing

Absorption costing is a costing method in which all costs of manufacturing a particular item/ product including both fixed and variable are made part of the product cost of the said item/ product. In other words, the cost incurred to produce a single unit of a specific product will include costs of:

  • Direct material
  • Direct labor
  • Variable manufacturing overhead
  • Fixed manufacturing overhead

Under the said costing method, the costs mentioned below are considered as period costs and are not made part of a product:

  • Fixed selling and administrative costs
  • Variable selling and administrative costs

Example of Absorption Costing

Company ABC manufactures and sells a single product. The costs of manufacturing a single unit of a product is as follows:

Variable Costs Per Unit

  • Cost of direct labor = $10
  • Cost of direct material = $20
  • Variable manufacturing overheads = $12
  • Variable administrative and selling costs = $5

Fixed Costs

  • Fixed manufacturing overheads = $150,000
  • Fixed administrative and selling costs = $110,000

Over the year, ABC Company manufactured 60,000 units of the product.

Under the absorption costing method, the product cost of a single unit is as follows:

Product cost = $10 + $20 + $12 + ($150,000/ 60,000) = $44.5

 

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