Absorption and Allocation Costing

8/9/2019 Absorption and Allocation Costing

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Absorption and Allocation

Costing

Prepared By:-Ashish Goyal

www.find4education.com

www.amcap.in


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Absorption Costing

Absorption costing, is a costing technique thatincludes all manufacturing costs, in the form ofdirect materials, direct labour, and both variable

and fixed manufacturing overheads, whiledetermining the cost per unit of a product. It isalso referred to as the full- cost technique.


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Variable Costing

Only those costs of manufacturing that vary withoutput (variable costs) are treated as productcosts

This would include direct material, direct laborand variable manufacturing overhead

Fixed manufacturing overhead is expensedduring the current period

Variable costing is used for internal planning andcontrol only


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Overview of Absorption and

Variable(Marginal) CostingThe only cost of driving my car

on a 200 mile trip today is

$12 for gasoline.

VariableCosting


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Variable CostingNo! You must consider these costs too!

AbsorptionCosting

Cost Per month Per da

Car pa mentInsurance 6


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Variable (Marginal) Costing You are wrong. have the car

payment and theinsurance payment even if

do not make the trip.

VariableCosting


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Variable CostingWhos right?

How should we treat the car

payment and the insurance?


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Variable Costing

Direct Materials

Direct Labor

Variable Manufacturing Overhead

Fixed Manufacturing Overhead

Variable Selling and Administrative Expenses

Fixed Selling and Administrative Expenses

VariableCosting

AbsorptionCosting

ProductCosts

PeriodCosts

ProductCosts

PeriodCosts


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Balance SheetCosts nventories

Note: Manufacturing Cost Flows

ncomeStatementExpenses

Cost of

GoodsSold

Fixed Mfrg OH

Selling and

Administrative

Period Costs

Work inProcess

FinishedGoods

Raw Materials

VariableManufacturing

Overhead

Material Purchases

Direct Labor

Selling andAdministrative

FixedManufacturing

Overhead


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Cost Allocation Overview

What is Cost Allocation?

Cost Allocation is a Process to Determine the

Total Cost of a Cost Objective

Achieved By Distributing or Apportioning

Costs to a Benefiting Cost Objective

Using Statistical Data or Metrics that Measure

the Usage of a Service or the Relative BenefitReceived

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What is a Cost Objective?

A Cost Objective is a particular award,

contract, grant, project, service, or other

activity of an organization for which cost

data are desired and for which provision

is made to accumulate and measure the

costs

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What is the Total Cost of a CostObjective?

Total Cost is composed of the sum of theallowable direct costs and allocable indirect

costs, less any applicable credits.

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Total Costs = Direct + Indirect

Direct Costs

Can be identified

specifically with a

particular final cost

objective (i.e., a

particular award,

service or direct

activity)

ndirect Costs

Incurred for common

or joint objectives and

cannot be readily

identified with a

particular final cost

objective

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Allocating Indirect Costs

Allocation Bases: The methodology orstatistical measure by which ndirectCosts are distributed to other benefiting

services and/or cost objectives Examples May Include:

Number of Active Employees;

Number of Transactions Processed;

Square Footage Occupied; Salaries and Wages of Units Supervised;

Direct Assignment

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Allocating Indirect Costs

Allocation Bases: The methodology orstatistical measure by which ndirectCosts are distributed to other benefiting

services and/or cost objectives Examples May Include:

Number of Active Employees;

Number of Transactions Processed;

Square Footage Occupied; Salaries and Wages of Units Supervised;

Direct Assignment

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Simple Example:Centrally Located Copier

Cost to Operate includes: Lease Payments Repairs & Maintenance Toner Paper Supplies, etc.

Direct Costs


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Copier Example (continued):What about electricity used, the space

it occupies, the office managers time

paying related bills, ordering paper &

supplies, arranging deliveries and

coordinating servicing, etc.?

ndirect Costs


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Copier Example (continued):Three Divisions Utilize

Division A 12 StaffDivision B Staff

Division C 22 Staff


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Copier Example (continued): How Do We Apportion or Allocate These

Costs to the Three Divisions?

Equal Distribution (i.e., 1/3rd Each) Good

Number of Staff Using the Copier A 30%, B 15%, C 55% Better

User Codes Measures Actual Usage of the Copier Best


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What is a Cost Allocation Plan?

A Cost Allocation Plan is a set of documents thatrelate to a process where ndirect Costs are allocatedusing a set of allocation methods to benefiting CostObjectives

The Purposes of a Cost Allocation Plan are as follows: They are often the only way to determine the total cost of

operating programs

They allow an organization to ensure that it is recovering allallowable costs incurred by the organization

They can provide valuable management data to anorganization regarding funding levels and time spent onactivities (when time and effort reporting is also employed)

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THANK YOU

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Absorption and Allocation Costing