Absorption Costing | Meaning | Income Statement proforma under A.C

Absorption costing meaning

The other name of absorption costing is full costing, total costing, conventional costing and orthodox costing. Under absorption costing, both fixed costs and variable costs are charged to cost units. Absorption costing is a technique or principle of cost ascertainment. All the financial accounting statments are based on the absorption costing.

Income statement under Absorption Costing

All the costs are divided into three categories under absorption costing as manufacturing, selling and administrative cost.

1. Category 1: Firstly, all the manufacturing costs both fixed and variable are deducted from the sales revenue to get gross margin/gross profit on sales in income statement.

2. Category 2: Secondly, the selling and administrative expenses both fixed and variable are deducted from the gross margin/gross profit to arrive at the net operating income.

3. Category 3: The fixed factory or manufacturing overheads are charged to the units produced on the basis of predetermined fixed manufacturing overhead rate. The following formula is used to calculate the fixed manufacturing overhead rate.

= (Standard fixed manufacturing overheads / Normal level of output)

If the actual level of output is more or less than the normal level of output, adjustments are made for the level of output differences. If the actual level of output is more than normal level of output, the amount of over absorption is subtracted from the total cost of goods manufactured and sold. If the actual level of output is less than normal level of output, the amount of under absorption is added with the cost of goods manufactured and sold.

Proforma of Income Statement under A.C

A proforma of Income Statement under Absorption Costing is presented below.

Amount in Rs.
SalesXXX
Less: Manufacturing cost
1. Variable Cost
Direct Material CostXXX
Direct Labour CostXXX
Variable Manufacturing overheadXXX
2. Fixed factory (Manufacturing) overheadXXX
Cost of goods manufacturedXXX
Add: Opening StockXXX
Cost of goods available for saleXXX
Less: Closing stockXXX
Cost of goods soldXXX
Add: Under absorption of factory (manufacturing) overheadXXX
(or)
Less: Over absorption of factory (manufacturing) overheadXXX
Cost of goods sold at actualXXX
Gross profit on saleXXX
Less: Fixed selling and administrative expensesXXX
Variable selling and administrative expensesXXXXXX
NET OPERATING INCOMEXXX

Leave a Reply

Recent Posts




Comments


Related pages


average inventory perioddifference between advertising and publicitystages in the selling processfiling in alphabetical orderbill of exchange drawerdisadvantages of securitizationdupont frameworkaudit tickuncalled share capitalarrear calculatorproduction order quantity calculatorfranchisee definitionwhat is the break even ebitmaterials quantity varianceadvantages and disadvantages of centralized and decentralized purchasingnegotiable instrument in hindiwhat is mixed economy advantages and disadvantagesadvantages and disadvantages of electronic bankingadvantages and disadvantages of centralized and decentralized purchasingshipping cif meaningnegative aspects of capitalismurbanisation characteristicsobjectives of rbiextraordinary agmadvantages of centralised structurecost audit meaningprocedure for declaration of dividendsole traders advantages and disadvantagesmeaning of auction in hindiroles and responsibilities of salesmaninter connected stock exchange of indiawhat is the meaning of allotdisadvantages of centralization and decentralizationcartel arrangementratification company lawicra credit ratingcardboard pigeon holescaveat emptor casesdishonored billdepositories definitionlifting of corporate veil in company lawexamples of amalgamation of companiesimportance of merchant bankingmeaning of amalgamated companycharacteristics of capitalist economic systeminsurable interest in insurancesalary arrearsmerits of capitalismcapital budgeting and investment decisionsnominal ledger definitionessential requisites of a contractcartels definedirect and indirect quotes in foreign exchange marketin a capitalistic economybulk breaking in marketingagreement not expressly declared voidmake or buy decision example accountingprècisbrand extension strategieswhat are the characteristics of a mixed economydeductive and inductive meaningmethods of absorption of factory overheadstypes of export housesconcept of caveat emptorultra vires doctrine definitiondisadvantage of magazine advertisingconsumer durable goods examplesformula for calculating payback periodmatrix organizational structure advantages and disadvantagesasset utilization ratio formulastructure european unionallot meaning