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.
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
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

Leave a Reply

Recent Posts


Related pages

role of rbi in rural creditbudgetary control in accountingconsumer advantages of e commercemarket differentiated pricingregulations of sebinon budgetarywhat are the disadvantages of franchisingmanpower requirements definitionproduct mix width definitionrsq formulaprècisquota sample exampleurbanisation characteristicsconcept of securitizationdividend payout ratio interpretationwhat is vouchingproces costingdefine budgetedaudit procedures for receivablesdisadvantages of a mixed economydefine demeritdebt securitization meaningmeaning of sebi wikipediawhat is labour efficiencydefine corporate veiloligopoly disadvantagesa report on procedure of winding of partnership firmfinancial accounting versus managerial accountingthe doctrine of privity of contractnumeric filing definitionmerits and demerits definitionwhat is the meaning of capexprivity doctrineperpetual stock countaccounting tickmarkshundies meaningsebi guidelines for secondary marketmechanizingfactoring for small businessweaknesses of irramalgamated company meaningpros and cons of fdidisadvantage of being a sole traderrule of caveat emptorautocratic leadershipmerit and demerits of internetdic industriesmgmt toolsamalgamated company meaningexamples of mergers and acquisitionswhat is the definition of mercantileauthoritarian leadership advantagesadvertisement and propagandaultra vires doctrine definitionadvantages and disadvantages of skimmingdefinition of allotment of sharesdefine malfeasancefactory indirect materialsadvantages of autocraticpurchase price variance formulasrs samplingcharacteristic of mixed economydefinition salesmandefinition of cluster sampling in researchretailing definefeatures of autocracytypes of managerial communicationsubcultures of indiatotal productive maintenance definitiongeneral agreement on tariffs and trade pdfcost element accountingdematerialisation of shares pptbusiness cycle in managerial economicsdisadvantages of budgeting