Reference no: EM132786192

Question: Find a journal article online about a company that recently added or dropped a product or service, or a company that decided to outsource. In the subject line of your post, include the name of the article that you read. Post a link to that article with your initial post, and provide a summary and a reaction to the article.

The summary should be approximately 150 words, and the reaction should be approximately 150 words. The summary should describe the major points of the article, and the reaction should demonstrate your interpretation of the article and how you can apply that knowledge.

Provide reference on separate page

The Absorption Costing Method

Summary:
The article explains the concept of Absorption Costing and how it is used for the allocation of costs for the production of goods. Goods absorb a wide range of costs which include fixed as well as variable costs. These may not be recognised as current period expenses when they incur. Instead, these costs stay in the balances of inventory until they are sold. At this point their costs is charged to COGS known as cost of goods sold. This concept is covered by Absorption costing. Absorption costing is a method used to determine the value of inventories, and takes into account the expense of direct material and labour, as well as variable and fixed production overheads. It is one of the many methods of Management Accounting systems. Under this method, the variable and fixed direct expenses are included in the cost of production while indirect costs like selling expenses and administration expenses are considered as period costs and itemized as expenses in the period of occurrence.

Absorption costing technique follows certain steps for the cost allocation purpose. These include -

1. Assignment of costs to cost pools - A mapping is prepared for different sets of accounts to different cost pools. This is to be considered precisely by the management as regular changes may not be allowed because of their impact on future analysis.

2. Calculation of usage on the basis of activity measures like labour hours or machine hours.

3. Assignment of costs - calculation of the allocation rates and allocation of the overheads to the manufactured goods.
Overall, the journal illustrates practical examples of the allocation of various costs using the Absorption costing technique.

Reaction;
The article is a detailed discussion and analysis of Absorption costing technique in various manufacturing units. Precisely, it is a great tool if anyone wants to understand the cost allocation method. Although there are various cost allocation techniques in current world like Marginal costing, ABC Costing etc., absorption costing has not lost its significance. It is the most sought costing technique. The article explains how it is different from Variable costing where fixed manufacturing costs are also treated a period costs. I believe, this method is quite relevant when one has to determine the selling price of the manufactured product. The balance of inventory is comparatively more accurately presented which is an added advantage. The article truly has immense learning.

Attachment:- Absorption Costing Method.rar