Absorption costing

Absorption costing

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I am attempting to undertake a massive costing project for a firm where there has previously been no manufacturing costing; so no manufacturing departments or any sort of apportionment of overheads etc. Stock valuations have been in effect estimated and therefore the project is high priority as the business is expanding and the financial reporting is suffering because the costings have not developed with it.

Without going into the nitty gritty, I am attempting to keep things simple and have set up four manufacturing departments to which I can apportion overheads; a fabrication department, machining centre, assembly and upholstery. I will be using the standard OAR of either Machine or Labour Hours in the relative departments. Because record keeping in this area is so weak, I want to keep it simple and simply absorb all of the production labour into the OAR. Normally I would have Direct Labour and then any non-productive time as overheads which will then get re-absorbed in the OAR. I can't see a reason that would stop me simply putting the Direct Labour in the 'overhead pot' as it will get absorbed one way or another. Is this something that would not be accepted under IAS 2 as it only states that full absorption is required, not necessarily the method....? The Direct Labour in the Machine Shop is particularly difficult anyway as there a multiple jobs undertaken where either the machinist sits with the machine, or can set one going and go onto another - so I think I can argue for it here anyway, but I am more worried about the Labour Hour departments such as Fabrication, Upholstery and Assembly. What are your views?

 

 

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