Accumulates only product costs, direct and indirect, to measure product cost. The gross margin (under absorption costing) is sales revenue minus all product costs, including applied fixed manufacturing overhead. Absorption costing averages all product costs across units produced. When there are large amounts of committed or fixed costs, making more units reduces the average cost per unit, which may be a visible number. Also, placing some units in inventory defers all the costs of those units from being recognized as expense, which could increase currently reported income.
Saturday, March 27, 2010
Absorption Cost
Accumulates only product costs, direct and indirect, to measure product cost. The gross margin (under absorption costing) is sales revenue minus all product costs, including applied fixed manufacturing overhead. Absorption costing averages all product costs across units produced. When there are large amounts of committed or fixed costs, making more units reduces the average cost per unit, which may be a visible number. Also, placing some units in inventory defers all the costs of those units from being recognized as expense, which could increase currently reported income.
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