- This topic has 5 replies, 2 voices, and was last updated 10 months ago by John Moffat.
- December 31, 2019 at 10:40 am #556561nicyzk
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.December 31, 2019 at 5:39 pm #556590John MoffatKeymaster
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.January 1, 2020 at 4:15 am #556599nicyzk
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?January 1, 2020 at 10:50 am #556611John MoffatKeymaster
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.January 1, 2020 at 1:25 pm #556621nicyzk
Thanks so much for your help sir really appreciate it! And happy new year as well 🙂January 2, 2020 at 6:43 am #556663John MoffatKeymaster
You are welcome 🙂
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