Absorption Costing Converts Fixed Production Overheads into Product Cost

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Absorption Costing Converts Fixed Production Overheads into Product Cost
Absorption Costing is a tool which converts fixed production overheads, which are period based expenses, into product cost on a per unit basis. As a result of which one is able to determine the product cost and hence the price.
After the period has ended, under or over applied overhead costs are discovered, and the following treatments can be made:
1. Apportioned to cost of goods sold, finished goods and work in progress.
2. Carried forward to next accounting period.
3. Adjusted with cost of goods sold only.

Absorption Costing and Price
Richard D. Cushing
"Absorption costing" or any other costing method cannot "determine... the price." The market always determines "the price." The only thing manufacturing cost can determine is whether or not an organization can manufacture an item at a cost low enough that, when sold at a price the market accepts, the price will cover truly variable costs plus operating expenses plus profit. If the result is "yes," then the item will continue to be manufactured by the organization in question. If the answer is "no," then the item will cease to be manufactured by the organization.

Absorption Costing: Transferring Overheads to P&L
shafana, Member
The under and over applied overheads can be transferred to the P&L a/c accordingly.

Absorption Costing and Variance
Samsiah, Member
@Shafana: What P&L account? Do we need to create a special P&L a/c for the variance?

Absorption Costing & P&L
Manven, Member
@Shafana: Only a major change in Inventory has effect on absorption costing in the P&L; other items are actually treated as revenue or expense.
If you are doing a variance analysis before the P&L is made, then this effect can be mentioned in the current period or else needs to be adjusted as carry forward effect to the next period.


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