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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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Overview of Absorption and
Variable CostingNo! You must consider these costs too!
AbsorptionCosting
Cost Per month Per da
Car pa mentInsurance 6
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Overview of Absorption and
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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Overview of Absorption and
Variable CostingWhos right?
How should we treat the car
payment and the insurance?
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Overview of Absorption and
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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Cost Allocation Overview
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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Cost Allocation Overview
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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Cost Allocation Overview
Simple Example:Centrally Located Copier
Cost to Operate includes: Lease Payments Repairs & Maintenance Toner Paper Supplies, etc.
Direct Costs
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Cost Allocation Overview
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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Cost Allocation Overview
Copier Example (continued):Three Divisions Utilize
Division A 12 StaffDivision B Staff
Division C 22 Staff
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Cost Allocation Overview
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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