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In absorption costing, overhead absorption rate or blanket rate is key to spread all overheads on production of volume of product, because if we don't have the overhead absorption rate manufacturing overhead cannot be spread or there is no basis for allocation of overheads on manufactured units.
marginal costing is recommended by IAS and absorption costing is not recommended by IAS,marginal costing is used for internal purposes and absorption costing is ysed for external purposes,in marginal costing the fixed production overheads are not calculated as a product cost and in absorption costing the fixed prodution overheads are calculated as product cost.
Absorption method is that in which predetermined overhead rate is use to allocate all overheads to departments or activities.
marginal costing considers only direct) materials,labour,expenses and variable factory overheads excluding fixed factory overheads but absorption considers (direct) materials ,labour,expenses,variable and fixed factory overheads.
Under absorption costing overheads are allocated to production based on predetermined overhead rates like machine hours, or direct labor hours etc while in direct costing overheads are allocated based on activity performed and relationship with production units.
Over or Under AbsorptionNote that as long as planned level of activity and the actual level of activity is not the same there is always an Over or Under Absorption situationThis is because overhead absorption rate is set at the start of the period based upon an expected level of production and that during the period, the level of output and or overheads will be different from the planned overheads and or output.OVER-absorption occurs when the total overhead recovered or absorbed is GREATER than the actual level of overheads for the period.UNDER-absorption occurs when the total overheads recovered or absorbed is LESS than the actual overheads incurred in the period.
Over or Under AbsorptionNote that as long as planned level of activity and the actual level of activity is not the same there is always an Over or Under Absorption situationThis is because overhead absorption rate is set at the start of the period based upon an expected level of production and that during the period, the level of output and or overheads will be different from the planned overheads and or output.OVER-absorption occurs when the total overhead recovered or absorbed is GREATER than the actual level of overheads for the period.UNDER-absorption occurs when the total overheads recovered or absorbed is LESS than the actual overheads incurred in the period.
In absorption costing, overhead absorption rate or blanket rate is key to spread all overheads on production of volume of product, because if we don't have the overhead absorption rate manufacturing overhead cannot be spread or there is no basis for allocation of overheads on manufactured units.
marginal costing is recommended by IAS and absorption costing is not recommended by IAS,marginal costing is used for internal purposes and absorption costing is ysed for external purposes,in marginal costing the fixed production overheads are not calculated as a product cost and in absorption costing the fixed prodution overheads are calculated as product cost.
Absorption method is that in which predetermined overhead rate is use to allocate all overheads to departments or activities.
marginal costing considers only direct) materials,labour,expenses and variable factory overheads excluding fixed factory overheads but absorption considers (direct) materials ,labour,expenses,variable and fixed factory overheads.
Absorption costing income statement is that statement in which overheads are charged to units of products based on predetermined blanket rate.
Under absorption costing overheads are allocated to production based on predetermined overhead rates like machine hours, or direct labor hours etc while in direct costing overheads are allocated based on activity performed and relationship with production units.
In Activity based costing all overheads are charged to function or department based on activities they perform while in absorption based accounting, overheads are apportioned using some kind of base rate like labor hours or machine hours etc.
Single absorption rate is overall rate to allocate overheads to units of product based on some other base like machine hours or direct labor hours etc.
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Absorption Costing (also known as traditional costing approach or full costing) absorbs all costs incurred to produce goods, which can result in misleading product cost information for decision-making. In absorption costing, fixed overheads are considered as product cost. These are added in the cost of inventory and not shown as separate item (period cost) in the income statement. The full cost includes cost of direct materials, direct labor, variable manufacturing overheads and fixed overheads. The absorption costing focuses only on total cost viz. variable and fixed and it is not useful for managers to take decision, plan about future and exercise control. The cost volume profit relationship is ignored because it takes into account the total cost. Absorption costing is suitable only in those companies where equal number of units are produced and sold. However, a business operates in a dynamic environment and production and sales keep on fluctuating on a regular basis. Therefore, as absorption costing is used in such a scenario, the cost will keep on fluctuating...