Acc 561 Managerial Analysis Paper
Absorption Based Costing – Managerial Analysis
Liliana Evans
ACC 561
11 May 2014
Professor Jill Datema
Absorption Based Costing – Managerial Analysis
Absorption based costing method (ABC) is used by companies to identify activities that it performs and then assigns direct and indirect costs to the product’s overall pricing. This method helps businesses determine the cost drivers that influence the product’s sales price by increase or decrease. ABC uses cost drivers, such as, direct labor, direct material along with transaction-based drivers. In this way, long-term variables overheads, traditionally considered fixed costs, can be traced to products (AICPA, 2014). The process used when applying the ABC method …show more content…
Pricing accuracy is due to the utilization of unit cost rather than just total costs. Absorption based costing mirrors how production is done which can help facilitate benchmarking. The ABC method can help Ideal Manufacturing’s management better understand the overhead incurred due to production. “ABC helps management manage overhead and understand profitability of products and customers and, therefore, it is a powerful tool for decision making” (AICPA, 2014). Absorption costing matches costs with revenues to a particular time period. If Ideal Manufacturing is looking to manufacture products to sell at a later time, absorption costing is a method to use for in-house overhead allocation. Through absorption costing, the expense incurred from the production of inventory is not expensed until the inventory has been sold. Therefore, Ideal Manufacturing would have an opportunity to improve profits by periods. Let’s take a look at how costs would be allocate if Ideal Manufacturing used activity based costing for in-house and outside services.
Activity Based Costing Overhead Costs for In-/Out- house
Liliana Evans
ACC 561
11 May 2014
Professor Jill Datema
Absorption Based Costing – Managerial Analysis
Absorption based costing method (ABC) is used by companies to identify activities that it performs and then assigns direct and indirect costs to the product’s overall pricing. This method helps businesses determine the cost drivers that influence the product’s sales price by increase or decrease. ABC uses cost drivers, such as, direct labor, direct material along with transaction-based drivers. In this way, long-term variables overheads, traditionally considered fixed costs, can be traced to products (AICPA, 2014). The process used when applying the ABC method …show more content…
Pricing accuracy is due to the utilization of unit cost rather than just total costs. Absorption based costing mirrors how production is done which can help facilitate benchmarking. The ABC method can help Ideal Manufacturing’s management better understand the overhead incurred due to production. “ABC helps management manage overhead and understand profitability of products and customers and, therefore, it is a powerful tool for decision making” (AICPA, 2014). Absorption costing matches costs with revenues to a particular time period. If Ideal Manufacturing is looking to manufacture products to sell at a later time, absorption costing is a method to use for in-house overhead allocation. Through absorption costing, the expense incurred from the production of inventory is not expensed until the inventory has been sold. Therefore, Ideal Manufacturing would have an opportunity to improve profits by periods. Let’s take a look at how costs would be allocate if Ideal Manufacturing used activity based costing for in-house and outside services.
Activity Based Costing Overhead Costs for In-/Out- house