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Describe Traditional Absorption Costing

      

Describe Traditional Absorption Costing

  

Answers

Faith
Absorption costing means establishing costs for work done by adding indirect costs (overheads) to the direct costs of materials and labour used in producing the work. The principle justification of absorption costing is the matching or accrual concept of accounting whereby revenues are matched with the associated costs both direct and indirect.

Any item that is costed must have both direct costs (and in a system of absorption costing, a share of indirect cost). Direct costs can easily be traced to the final product, job or service. Overheads however cannot be directly traced to the final product and therefore a system must be established to determine the overhead attributable to the unit, service or job. This can be achieved through:
(a) Overhead cost allocation
(b) Overhead cost apportionment
(c) Overhead cost absorption (or recovery)

(a) Overhead Cost Allocation
It is that part of cost attribution which charges a specific cost to a cost unit or a cost centre. Every item of overhaul must be changeable directly to a specific cost centre and the cost accounting system must be designed in such a way that there are sufficient cost centres to ensure that this can be done.
Examples of cost centres are:

- Production departments
- Production service cost centres which services production centre e.g canteen
- Administration dept
- Sales and distribution department and shared cost centres

(b) Overhead Apportionment
This is that part of cost attribution which shares costs ensuring two or more cost centers or cost units in proportion to the extracted benefit received. The purposes of cost apportionment are:

(i) To group overhead costs into three broad categories. These are:
1. Production overheads
2. Administration overheads
3. Selling, marketing and distribution overheads.

(ii) To group total production overheads into departmental overhead costs for each direct production departmental overheads.

(c) Overhead Cost Absorption:
This is the process whereby the costs of production cost centres are added to the cost units ( unit of production, job or service)
Titany answered the question on October 12, 2021 at 06:26

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