1. What is Absorption Costing?

Absorption costing is a costing method that includes all manufacturing costs - direct materials, direct labor, and both variable and fixed manufacturing overhead - in the cost of a product. It is also known as full costing.

2. How Does the Calculator Work?

The calculator uses the absorption costing formula:

Where:

• \( DM \) — Direct Materials cost (currency)
• \( DL \) — Direct Labor cost (currency)
• \( OH \) — Overhead cost (currency)
• \( Units \) — Number of units produced

Explanation: This formula calculates the cost per unit by dividing total manufacturing costs by the number of units produced, providing a comprehensive cost per unit for inventory valuation and pricing decisions.

3. Importance of Absorption Costing

Details: Absorption costing is required for external financial reporting under generally accepted accounting principles (GAAP) and International Financial Reporting Standards (IFRS). It provides a more complete picture of product costs for inventory valuation and income determination.

4. Using the Calculator

Tips: Enter all cost components in currency units and the number of units produced. All values must be valid (costs ≥ 0, units > 0). The calculator will compute the absorption cost per unit.

5. Frequently Asked Questions (FAQ)

Q1: What is the difference between absorption costing and variable costing?
A: Absorption costing includes fixed manufacturing overhead in product costs, while variable costing treats fixed overhead as a period expense. This difference affects inventory valuation and net income.

Q2: When is absorption costing required?
A: Absorption costing is required for external financial reporting and tax purposes under GAAP and IFRS standards.

Q3: What are the advantages of absorption costing?
A: It matches costs with revenues better, complies with accounting standards, and provides a more comprehensive view of product costs for long-term decision making.

Q4: What are the limitations of absorption costing?
A: It can lead to inventory profit, may encourage overproduction, and doesn't separate fixed and variable costs for internal decision making.

Q5: How does absorption costing affect income statements?
A: Under absorption costing, fixed manufacturing costs are included in inventory and only expensed when goods are sold, which can result in different profit patterns compared to variable costing.