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Absorption Costing Example - Overheads, Cost Accounting Video Lecture | Cost Accounting - B Com
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FAQs on Absorption Costing Example - Overheads, Cost Accounting Video Lecture - Cost Accounting - B Com
| 1. What is absorption costing and how does it differ from other costing methods? |  |
Ans. Absorption costing is a costing method used in managerial accounting, where all the costs (both variable and fixed) incurred in the production of goods or services are allocated to the products. This method includes direct costs such as direct materials and direct labor, as well as indirect costs or overheads such as rent, utilities, and depreciation. In contrast, other costing methods such as variable costing only include variable costs in the product cost calculation, excluding fixed overhead costs.
| 2. How are overhead costs allocated in absorption costing? | |
Ans. In absorption costing, overhead costs are allocated to products based on a predetermined overhead rate. This rate is calculated by dividing the total estimated overhead costs for a specific period by the estimated allocation base, such as direct labor hours or machine hours. The predetermined overhead rate is then multiplied by the actual allocation base used by each product to determine the allocated overhead cost.
| 3. What are the advantages of using absorption costing? | |
Ans. Absorption costing offers several advantages. Firstly, it provides a more accurate representation of the total cost of producing a product by including both variable and fixed costs. This helps in making pricing decisions, determining profitability, and setting appropriate selling prices. Secondly, absorption costing is required for external financial reporting purposes, as it follows the generally accepted accounting principles (GAAP). Lastly, absorption costing helps in determining the full cost of inventory, which is important for financial statements and tax calculations.
| 4. Can absorption costing lead to over or under-absorption of overhead costs? | |
Ans. Yes, absorption costing can lead to over or under-absorption of overhead costs. Over-absorption occurs when the actual overhead costs incurred are less than the allocated overhead costs. This can happen if the actual allocation base used is lower than the estimated allocation base, resulting in higher allocated overhead costs. Conversely, under-absorption occurs when the actual overhead costs are higher than the allocated overhead costs. This can happen if the actual allocation base used is higher than the estimated allocation base, resulting in lower allocated overhead costs.
| 5. How does absorption costing affect inventory valuation and profit calculation? | |
Ans. Absorption costing affects inventory valuation and profit calculation by including fixed overhead costs in the cost of inventory. This means that a portion of the fixed overhead costs is allocated to each unit of inventory, increasing the carrying value of inventory on the balance sheet. When the inventory is sold, the allocated overhead costs are recognized as an expense in the income statement, reducing the profit. Therefore, absorption costing generally results in higher inventory values and lower profits compared to variable costing, where fixed overhead costs are treated as period costs and not included in inventory valuation.
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Nov 15, 2024 Last updated |
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