Confusion of use of absorption costing

NNic6y ago

Hi sir, i have a few questions regarding the use of absorption costing in financial statements? 1) Do they include service overheads like in full absorption costing (taught in F2) or stop at production overheads? 2) Are they used to arrive at a standard cost first (like in cost variance analysis) or do we directly absorb actual costs into each unit? 3) Finally, is absorption costing used together with FIFO and AVCO for valuing inventories in FS? Thank you so much for your time and hope to hear from you soon.

John MoffatTutor6y ago#1

Hi, in answer to your questions: 1. Absorption costing is absorbing production overheads. Service overheads are only relevant if the overheads are servicing production departments. 2. Absorbing is absorbing the cost into to the units produced. 3. The valuation of inventory depends on whether the company is using marginal costing or absorption costing. However, although all of the above is very relevant to Paper MA, it is much less relevant for Paper PM. My lectures for Paper PM are a complete free course and cover everything needed to be able to pass Paper PM well.

NNic6y ago#2

Thanks for your help sir, just one more question, in valuing inventory for financial statements, do we do absorption costing at the beginning of the period or at end of period?

John MoffatTutor6y ago#3

We use the same method for both opening and closing inventories. So if they are using absorption costing then they value both inventories at the absorption cost.

NNic6y ago#4

Thanks so much for your help sir really appreciate it! And happy new year as well :)

John MoffatTutor6y ago#5

You are welcome :-)

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