Absorption costing
Absorption costing is a process of tracing the variable costs
of production and the fixed costs of production to the
product.
Its allocates following manufacturing costs to the product.
Direct Materials
Direct labour
Overhead
How does it work?
1. Direct materials are purchased and recorded as an asset.
2. As direct materials are placed into production, their cost
is transferred from the raw materials account to the Work-in-Process account (an asset)
3. As direct labor costs are incurred they are recorded in a
labor expense account. Throughout the year they are
transferred from the labor expense account to Work-in process account (an asset).
4. Overhead costs are initially accumulated in expense
accounts (electricity, depreciation, etc..). Throughout the
year they are transferred to Work-in-process.
5. When goods are completed, their costs (direct materials,
direct labor and overhead) are transferred out of Work-in process into Finished Goods.
6. When goods are sold, their costs are transferred out of
finished goods inventory (an asset) and into Cost of goods
sold (an expense).
Types of Absorbtion Accounting
- Job Order Costing
- Process Costing
- ABC Costing
Absorption costing is a process of tracing the variable costs
of production and the fixed costs of production to the
product.
Its allocates following manufacturing costs to the product.
Direct Materials
Direct labour
Overhead
How does it work?
1. Direct materials are purchased and recorded as an asset.
2. As direct materials are placed into production, their cost
is transferred from the raw materials account to the Work-in-Process account (an asset)
3. As direct labor costs are incurred they are recorded in a
labor expense account. Throughout the year they are
transferred from the labor expense account to Work-in process account (an asset).
4. Overhead costs are initially accumulated in expense
accounts (electricity, depreciation, etc..). Throughout the
year they are transferred to Work-in-process.
5. When goods are completed, their costs (direct materials,
direct labor and overhead) are transferred out of Work-in process into Finished Goods.
6. When goods are sold, their costs are transferred out of
finished goods inventory (an asset) and into Cost of goods
sold (an expense).
Types of Absorbtion Accounting
- Job Order Costing
- Process Costing
- ABC Costing