Register now or log in to join your professional community.
This phrase is used in cost accounting and involves the assigning, applying, or allocating of fixed manufacturing overhead costs to the units produced by a manufacturer. Three examples of fixed manufacturing overhead costs include1) depreciation of the manufacturing equipment,2) the property tax on the factory building, and3) the salaries of the factory supervisors. Each of these costs comes in large dollar amounts (they do not occur at a rate of say $1.00 per unit) and none is directly traceable to the products manufactured. The dollar amount of each of these costs will probably not change if the company produces10% more units or10% fewer units. Because the fixed manufacturing overhead costs are indirect product costs (not directly traceable to the products) the accountant allocates (or assigns or applies) these costs to the products on some basis—perhaps on the basis of machine hours or through activity-based costing. While the accountant assigns or allocates these costs, the products are said to be absorbing these fixed manufacturing costs. (Absorption costing, which is required for external financial statements, means that each product's cost includes direct materials, direct labor, variable manufacturing overhead, and fixed manufacturing overhead.) Fixed manufacturing overhead cost is usually applied to the products (and is absorbed by the products) through the use of a predetermined annual overhead rate that is based on some planned volume of production. If the actual product volume is less than the planned volume (and the costs are as planned) the fixed manufacturing overhead will be "under-absorbed." When the actual volume exceeds the planned volume and the costs are as planned, the fixed manufacturing overhead will be "over-absorbed."
Overhead absorbtion is allocating the period's overheads to the quantities produced. This is done in different ways where every company choose the method suitable to its business and asset utilization.
It means that the fixed overhead cost like lighting, canteen services has been allocated to a certain dept. If a production dept uses50% of the overhead services then it is logical that50% of the overhead cost should be absorved or paid for by the dept.
whether company produce1nos. product or1000nos. product fixed cost will be remain same.
it will not vary with production valum.
"Absorption Costing" means dealing with Fixed overhead as a product cost not a period cost
In costing , all the overheads whether fixed or variable are allocated to various cost centre to arrive at cost and profitability of the cost centre for thel purpose of monitoring and controlling and minimising according to the respective contribution and relativity of the overhead to the relevant cost centre.If directly relatable to the cost centre allocated to the cost centre directly.If not allocated to various cost centres based on some common factors/units.Thus allocated absorbed fixed overheads are the fixed overheads absorbed.
