2. Full / Absorption Costing:
Absorption costing is responsible for calculating unit cost of any product taking all cost (fixed, variable, direct, and indirect) into account. Indirect and Fixed costs are allocated and absorbed by the goods produced. It makes sure that all related cost of manufacturing the product is recovered from the selling price. This costing method is used for external reporting. The author has identified two decision making situations where this method is most appropriate.
2.1 Determine the mark up:
Absorption costing approach helps to determine the appropriate mark up on cost for individual products. Where it is practically impossible to estimate demand, cost plus pricing method is used by the manager to decide the price. …show more content…
ABC Company has policy of marking up unit cost by 50%, (Please refer to Appendix 7 for the cost estimates of the product)
The first step is to calculate the cost of each unit considering fixed and variable overheads: £
Direct material 8
Direct Labour 4
Variable Manufacturing Overhead 6
Fixed Manufacturing Overhead (70,000/10,000 units) 7
Unit cost 25
Thus the price citation sheet using absorption costing is:
Markup to cover admin/selling expense and earn 50% profit on unit cost …show more content…
3.1 Setting up a standard cost of each product:
By using ABC approach, managers can decide on the standard cost of each product. An example of this situation is given below as demonstrated in (Kaplan, CIMA, 2007) (Please find the facts and figures for the calculation below attached in Appendix 9)
The overhead costs of standard product Xbox 500 are:
Function Rate× annual usage (£)
Quality control 180 × 50 9000
Process set up 200 × 50 10, 000
Purchasing 100 × 50 5000
Customer Orders 70 × 10 700 24, 700
Dividing the total overhead cost by the total units of
Absorption costing is responsible for calculating unit cost of any product taking all cost (fixed, variable, direct, and indirect) into account. Indirect and Fixed costs are allocated and absorbed by the goods produced. It makes sure that all related cost of manufacturing the product is recovered from the selling price. This costing method is used for external reporting. The author has identified two decision making situations where this method is most appropriate.
2.1 Determine the mark up:
Absorption costing approach helps to determine the appropriate mark up on cost for individual products. Where it is practically impossible to estimate demand, cost plus pricing method is used by the manager to decide the price. …show more content…
ABC Company has policy of marking up unit cost by 50%, (Please refer to Appendix 7 for the cost estimates of the product)
The first step is to calculate the cost of each unit considering fixed and variable overheads: £
Direct material 8
Direct Labour 4
Variable Manufacturing Overhead 6
Fixed Manufacturing Overhead (70,000/10,000 units) 7
Unit cost 25
Thus the price citation sheet using absorption costing is:
Markup to cover admin/selling expense and earn 50% profit on unit cost …show more content…
3.1 Setting up a standard cost of each product:
By using ABC approach, managers can decide on the standard cost of each product. An example of this situation is given below as demonstrated in (Kaplan, CIMA, 2007) (Please find the facts and figures for the calculation below attached in Appendix 9)
The overhead costs of standard product Xbox 500 are:
Function Rate× annual usage (£)
Quality control 180 × 50 9000
Process set up 200 × 50 10, 000
Purchasing 100 × 50 5000
Customer Orders 70 × 10 700 24, 700
Dividing the total overhead cost by the total units of