Absorption Costing

Tags

finance

The [see page 12, method] used to obtain the full cost of a product or service.

This cost is used for inventory valuation in the annual report and can be used as a basis for determine [see page 14, product price] for a price-setter product.

Takes into account:

• Competitive and market conditions.
• Non-manufacturing overheads.
• Desired return.

\[ \text{Cost} + \text{Mark Up} = \text{Selling Price} \]

See actual process [see page 14, here] and see example see page 18, here.

[see page 21, Disadvantages]

• Disregards the demands side.
• Fixed cost per unit change with change in sales volume.
• Production overheads are allocated arbitrarily.
• Overhead allocation could over/under-cost products leading to prices out of line with the market.
• Incorrect pricing may lead to surplus inventory or lower ROI than expected.