17 October 2010
Absorption Costing is a technique of pricing consisting of certain rules & procedure with the help of which recovery rates are ascertained for determination of product price for the purpose of profit planning.
Steps to be followed
1. Prepare the production value chain. 2. Identify the cost centres- production & service cost centres.
3. Calculate the normal capacity or activity levels of each cost centres. Activity level implies the operating level of the cost centers. It is generally expressed in terms of units, capacity % or hours work. So always consider the normal or actual activity which is ever is higher.
4. Estimate the cost of each cost centers by applying the behaviour of costs . These costs are Direct Costs to each cost centers.
5. Estimate the Indirect cost of the products .
6. Identify the Prime Cost of the product.
7. Prepare the Production Overhead analysis sheet & show a. Allocation b. Apportionment c. Reapportionment d. Absorption/recovery/application/charging rates.
8. Compute the Production overhead of the product.
9. Add Administration overhead of production nature.
10. Compute the Cost of Production. 11. Adjust W.I.P. & Finished Stock. 12. Add Administration , Selling & Distribution Overhead
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