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A question in a kit says
A benefit of predetermined overhead in Absorption costing is that it avoids impact of any abnormal cost.
Sir can you explain this?Let’s say that thr normal cost of water used was $5,000 per year and that 100,000 units are budgeted for production. Water costs would be absorbed at $0.05 per unit and that would be added to product cost.
If then a serious water leak raised the water bill to $7,000, is it right to say that production costs should include $0.07 per unit?
The products are the same and the leak is an accident of timing.
So, keep the cost per unit the same and separately identify the extra 2,000 in the statement of P&L.
.Sir, in Marginal costing, we would charge (if any) abnormal events in product costs.
Thank you sir.
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