Absorption Costing Converts Fixed Production Overheads into Product Cost

Absorption Costing
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Prabhash, India

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.


Richard D. Cushing, USA

Absorption Costing and Price

"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.

Accountant, United Arab Emirates

Absorption Costing: Transferring Overheads to P&L

The under and over applied overheads can be transferred to the P&L a/c accordingly.... Sign up

Analyst, Malaysia

Absorption Costing and Variance

@Shafana: What P&L account? Do we need to create a special P&L a/c for the variance?... Sign up

Analyst, India

Absorption Costing & P&L

@Shafana: Only a major change in Inventory has effect on absorption costing in the P&L; other items ... Sign up


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Normal Production Levels Under FAS 151
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