Absorption Costing Techniques

Absorption Costing Techniques | ACT

In this article, you will learn How to Prepare an Income Statement, The Uses and Users of the Absorption Costing Techniques, The differences between the Marginal Costing Techniques (MCT) and the Absorption Costing Techniques (ACT), The advantages and the disadvantages of the Absorption Costing Techniques which is also known as the ACT in abbreviation.

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What is Absorption Costing Techniques (ACT)

The Absorption Costing Techniques is also known as TOTAL COST SYSTEM which is used for routine accounting report and it is the basis used when presenting financial accounting information.

ACT regards all fixed costs as part of a production. This means that it assumes that fixed production cost is incurred when goods are produced, and when goods are not produced, no fixed production cost will be incurred.

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The Absorption Costing Technique is based on the functional classification of cost whereby cost is categorized by function. Example: production cost, selling and distribution cost, and administrative cost.

How to Prepare an Income Statement for the ACT, MCT, and SCT

The Income Statement can be prepared with any of the cost accounting techniques among which are Absorption Costing Techniques (full costing technique), Marginal Costing Techniques (variable costing technique), and Standard Costing Techniques etc…

The 3 Major Differences Between Marginal Costing Techniques and Absorption Costing Techniques.

  1. The format of the presentation.
  2. The treatment of  the fixed production cost
  3. The Profit. This is usually different under the two methods when there is a closing stock value.
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Advantages of Absorption Costing Techniques.

  1. It obeys the matching concept as it matches cost with revenue in full.
  2. It does not ignore the importance of fixed costs.
  3. The Absorption Costing Techniques capitalizes on the effect of higher production volume to reduce unit cost.

Disadvantages of Absorption Costing Techniques.

  1. Excess production may tie down capital.
  2. Apportionment and absorption of overhead may be subjective.
  3. Calculation of over/under absorption of overhead may be problematic.
  4. It is complicated when the organization has many different manufacturing cost centers.

Video Guide on Absorption Costing Techniques

After watching this video on Absorption Costing Techniques, you will attempt all the questions in your textbook because the steps revealed in this video is definitely the best approach to solving any question under this topic ACT, Absorption Costing Technique