PPT: Overheads: Absorption Costing Method | Cost and Management Accounting for CA Intermediate PDF Download

 Page 1


g n i t s o C n o i t p r o s b A
Page 2


g n i t s o C n o i t p r o s b A
Introduce Raw 
Material 
Manufacture 
Product
Store Finished 
Goods
Sell Finished 
Goods
• Direct material 
are purchased
• Direct materials 
are placed into 
production
• Direct 
Labour 
applied to the 
product
• Overhead 
costs 
incurred
• Production 
process 
completed
• Goods are 
shipped for 
sales
Manufacturing 
Process
Page 3


g n i t s o C n o i t p r o s b A
Introduce Raw 
Material 
Manufacture 
Product
Store Finished 
Goods
Sell Finished 
Goods
• Direct material 
are purchased
• Direct materials 
are placed into 
production
• Direct 
Labour 
applied to the 
product
• Overhead 
costs 
incurred
• Production 
process 
completed
• Goods are 
shipped for 
sales
Manufacturing 
Process
Classification of Cost
Fixed Cost: Cost that doesn’t change with increase or decrease in the 
number of goods or services produced or sold.
Variable Cost: Cost that changes in proportion with production 
output.
Direct Cost:  Cost that can be completely assigned to the production of 
specific goods or services.
Indirect Cost: Cost that cannot be assigned to a cost object
Page 4


g n i t s o C n o i t p r o s b A
Introduce Raw 
Material 
Manufacture 
Product
Store Finished 
Goods
Sell Finished 
Goods
• Direct material 
are purchased
• Direct materials 
are placed into 
production
• Direct 
Labour 
applied to the 
product
• Overhead 
costs 
incurred
• Production 
process 
completed
• Goods are 
shipped for 
sales
Manufacturing 
Process
Classification of Cost
Fixed Cost: Cost that doesn’t change with increase or decrease in the 
number of goods or services produced or sold.
Variable Cost: Cost that changes in proportion with production 
output.
Direct Cost:  Cost that can be completely assigned to the production of 
specific goods or services.
Indirect Cost: Cost that cannot be assigned to a cost object
Period Cost: 
Cost that cannot be appointed to the product and it is charged 
to the period in which they arise. 
Example: Selling and Administration Costs like Rent and 
Salary
Product Cost:
Cost that is attributable to the product i.e. the cost is traceable 
to the product and is a part of inventory values. 
Example: Direct Material, Direct Labour Factory Overhead etc.
Page 5


g n i t s o C n o i t p r o s b A
Introduce Raw 
Material 
Manufacture 
Product
Store Finished 
Goods
Sell Finished 
Goods
• Direct material 
are purchased
• Direct materials 
are placed into 
production
• Direct 
Labour 
applied to the 
product
• Overhead 
costs 
incurred
• Production 
process 
completed
• Goods are 
shipped for 
sales
Manufacturing 
Process
Classification of Cost
Fixed Cost: Cost that doesn’t change with increase or decrease in the 
number of goods or services produced or sold.
Variable Cost: Cost that changes in proportion with production 
output.
Direct Cost:  Cost that can be completely assigned to the production of 
specific goods or services.
Indirect Cost: Cost that cannot be assigned to a cost object
Period Cost: 
Cost that cannot be appointed to the product and it is charged 
to the period in which they arise. 
Example: Selling and Administration Costs like Rent and 
Salary
Product Cost:
Cost that is attributable to the product i.e. the cost is traceable 
to the product and is a part of inventory values. 
Example: Direct Material, Direct Labour Factory Overhead etc.
Absorption Costing
It is the costing system which treat all the manufacturing 
costs including both the fixed and variable costs as product 
costs.
It is also referred as Full Costing.
It is used to calculate profit and valuation of inventory.