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The uses of absorption and adjustable costing

Accounting is the most crucial concept of any business. Various organizations change various accounting ideas in order to suit the necessity and routine of the business enterprise. Costing is an integral area of the accounting concept because the same assists with determining the cost of a product and related bills. Costing is termed to be the essential concept and everything the accounting model is structured in lines with the several costing patterns.

There are different types of organizations prevalent in a market and different organizations adapt different costing pattern depending on the organizational needs and habits. Different costing structures emphasise on different product habits. There are many costing model widespread in the market for example absorption priced at, varying costing etc. Within this assignment we will discuss about absorption and variable costing in details to give a short idea about the same and their uses.


Cost way of measuring is essential part for just about any organization. Though the cost measurement the initial stage but lays the foundation of the complete accounting process and helps in monitoring and handling the price plan of a business. The costing should be properly analysed in order to study the different aspects and informations. This process can be termed as 'cost management' which assists with planning the further functions and keeping a control on the cost pattern.

There are various types of costs that are segregated predicated on their characterestics and their stage of utilisation. In this posting the various types and the characterestics have been described.

OVERHEAD COSTS - indicates indirect costs that are not straight related to a particular product. For instance factory rent and it is due to all the merchandise that is made for the reason that specific factory. This is because the factory lease is not relevant to a particular batch of product produced throughout a time frame, whereas, it is sent out among all the products.

MARGINAL COST - identifies the price that pertains to a particular product and hence, can be attributable on product basis. For instance; the labour and material cost of something.

ACTIVITY BASED Priced at (ABC) - is management founded costing design whereby, different costing style, composition and details are collected and analysed based on the nature and degree of the same. Under this design, different costs are assigned to different products and services predicated on the amount of activities. ABC is often described as a method of improving the grade of management accounting home elevators several situations where classic over head allocation may produce overlapping or poor results.

An activity serves as a getting goods, inspecting goods and storing goods. We must work out the price of the activities at the various levels of product processing before allocating them to split up departments.

ACTIVITY BASED COSTING vs. Traditional Costing

ABC is comparatively a new concept and is also a management structured accounting whereby different costing structure has been associated with different sorts of products. ABC entails several types of cost numbers found in job costing or process costing systems.

ABC considers activities as the fundamental cost objects whereas, traditional costing will take into consideration product or service as the cost object.

Further, traditional costing assumes that resources are consumed by products/services whereas; ABC assumes that products/services consumes activities which in tun consumes resources.

VARIABLE COSTING is also known called marginal or immediate costing), costs a product or service at the expenses incurred to immediately create the product/provide the service, i. e. only like the variables costs. Variables costs are those costs that change as the amount of creation/sales changes. Illustrations are direct labour (more immediate labour equals more development/sales, direct materials more direct material equals more development/sales and so on. ).

Mostly, organisations put together their accounts predicated on variable costing guidelines since this format provides management with better information for inside decision-making. In addition, the variable costing also eradicate the factor of taking into consideration the same cost factor twice since it generally does not consider fixed creation overhead.


i) Assists with Internal managerial decisions

ii) Stock is undervalued

iii) The segregation of cost into different facets and helps in analysing cost pattern


i) It does not take into consideration of the predetermined cost and therefore, does not produce a in depth picture for taxes computation and other managerial decisions

ABSORPTION COSTING is also called full costing in certain cases. Under this technique of costing, something at the inventory calls for all the bills incurred i. e. immediate labour, direct material and both fixed and variable over head. Therefore, in simple words, under this technique of costing, at any given time, the price tag on goods involves all the types of bills involved with the development of the same.

Absorption priced at (sometimes called full costing) includes fixed overhead in the price of something or service. Therefore, under absorption priced at some approach to allocating that over head is necessary. Absorption costing is usually the mandatory costing measurement method for reporting inventory in external financial reviews.


i) Addition of Fixed Cost in production

ii) Assists with Internal managerial decisions and getting ready financial accounts

iii) Is accepted in Inland Revenue

iv) It distorts stock valuation

v) Helps in computing taxation


i) It takes into account both types of cost and hence, not used for management decisions

ii) Manipulations possible


Absorption costing might take into consideration all creation costs i. e. direct materials, immediate labour and both adjustable and fixed manufacturing overhead. In this technique of costing, fixed overhead is cared for as a product cost until the same is sold. It helps in functional examination on

FOMULAE: (Sales - Absorption Cost of Goods Sold) = Gross Profit

Variable costing identifies the summation of adjustable manufacturing costs specifically direct materials, immediate labour, and varying manufacturing overhead.

FORMULAE: Contribution Margin = Varying Cost of Goods Sold + Variable Offering + Administrative Bills and subtracted from Sales.

Behavioral Analysis of the Income Statement

Variable costing may also be used for Break-even Analysis

Rules about Absorption Costing Vs. Adjustable Costing.

a) If sales are variable and production constant.

If development is equal to sales, then absorption costing and changing costing gives the same amount of net gain.

If production higher than sales, then NET GAIN under absorption costing will be greater than net income under varying costing

If production less than sales, then Net Income under absorption costing will be less than net gain under changing costing

In the long-term process, net income will be similar under both costing methods.

b) If sales are continuous and creation is changing then:

Net income under variable costing does not fluctuate because of change in sales characters whereas, the same under absorption costing

Further, a numerical example has been analysed over here to give a brief idea about Absorption & Variable Costing.

Units Produced

200, 000

Sales Price

15. 00

Direct Materials Cost/Unit

4. 00

Direct Labour Cost/Unit

3. 00

Variable Creation Cost/ unit

2. 00

Variable Sales Cost/Unit

1. 00

Fixed Developing Overhead

200, 000

Fixed Offering Costs

100, 000

Unit Cost under Absorption Costing

Direct Materials Cost /Unit

$4. 00

Direct Labour Cost /Unit

$3. 00

Variable Creation Cost /unit

$2. 00

Fixed Manufacturing Over head/unit

$200, 000/ 200, 000 systems $1. 00

$10. 00

Unit Cost under Variable Costing:

Direct Materials Cost per Unit

$4. 00

Direct Labour Cost Per Unit

$3. 00

Variable Processing Cost Per unit

$2. 00

Total Cost Per Unit

$9. 00


In the above paragraphs, an attempt has been made to put across an detailed idea about the accounting ideas of Variable Costing & Full or Absorption Costing. Besides, talking about aspects, advantages and disadvantages of the same, I have also used a numerical example to build up a better idea a comparable. However, this assignment is at the mercy of limitations in regards to knowledge, time and resources.

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