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Absorption Costing Formula.: Finance For Non-Financials Series
Absorption Costing Formula.: Finance For Non-Financials Series
Non-
Financials
Series
Absorption
Costing
Formula.
Shared Knowledge = Shared Values 17/07/2021
Data Collected By: Hamed Ali
July 17, 2021 [ABSORPTION COSTING FORMULA.]
Data collected by Hamed Ali Mohamed, Master in food science & bio-technology
E-mail Hamed.ali.mohamed1982@gmail.com Address Eastern Provence, KSA
• Direct Labor
• Variable Overheads
• Fixed Overhead
For Absorption costing, we need only material cost, labor cost, and overheads. SG&A is not
part of absorption costing
Fixed Overhead Per Unit is calculated using the formula given below
Fixed Overhead Per Unit = Fixed Overhead / Number of Units Produced
Unit Cost Under Absorption Cost is calculated using the formula given below
Unit Cost Under Absorption Cost = Direct Material Cost Per Unit + Direct Labor Cost
Per Unit + Variable Overhead Per Unit + Fixed Overhead Per Unit
Explanation
Absorption costing is very important tool in management accounting for determining the
cost. But there are few limitations associated with this method.
• Since absorption costing distributes fixed overheads to the total production cost, it does not
help management in decision making and variable costing is more effective in that case.
• Since not all the cost is subtracted from the revenue while calculating the profit, absorption
costing can skew the profits and can show higher profits than actual.
• Also, since only fixed overhead is used here, it is spread on only the number of units sold.
Units which are not sold, the fixed overheads will not be allocated to these units. So
companies can generate extra profits by manufacturing more products which do not sell.