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Absorption Costing

This document provides an example of how absorption costing allocates indirect costs. It describes a company with three products (X, Y, Z) and their direct costs and sales revenue. The total indirect costs of $200,000 are allocated to each product based on their percentage of total sales revenue. This allows calculating the indirect costs and profits for each product and in total using an absorption costing statement template. It also provides a practice question to complete a similar statement for products Q, R, and S.

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Marusaha MP Siahaan
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80 views2 pages

Absorption Costing

This document provides an example of how absorption costing allocates indirect costs. It describes a company with three products (X, Y, Z) and their direct costs and sales revenue. The total indirect costs of $200,000 are allocated to each product based on their percentage of total sales revenue. This allows calculating the indirect costs and profits for each product and in total using an absorption costing statement template. It also provides a practice question to complete a similar statement for products Q, R, and S.

Uploaded by

Marusaha MP Siahaan
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd

IB Business Management Course Companion: toolkit worked example

Contribution (Absorption costing)


 
Absorption costing (also called full costing) is a managerial accounting method that captures
all costs associated with producing a given product. The direct and indirect costs are
accounted for using this method. Businesses must, however, decide how to allocate the
indirect costs to the various cost centres. This can be based on the number of employees, size
of the business departments, or the sales revenue among many other ways.

Worked example
A company produces three products: X, Y and Z. The table below shows the sales revenue and
direct costs for each of these products.

Product X Y Z

Sales revenue $350,000 $250,000 $400,000

Direct costs $100,000 $80,000 $250,000

The total indirect costs are $200,000.


The company then decides to allocate the indirect costs based on its sales revenue. The total
sales revenue for products X, Y and Z is $350,000 + $250,000 + $400,000 = $1,000,000.

The proportion of sales revenue for each product is shown below:

 Product X: ($350,000 ÷ $1,000,000) × 100 = 35%


 Product Y: ($250,000 ÷ $1,000,000) × 100 = 25%
 Product Z: ($400,000 ÷ $1,000,000) × 100 = 40%

As the indirect costs are $200,000, the indirect costs would be allocated as follows:

 Product X: 35% × $200,000 = $70,000


 Product Y: 25% × $200,000 = $50,000
 Product Z: 40% × $200,000 = $80,000

As a result, the absorption costing statement for products X, Y and Z is as shown below.

© Oxford University Press 1


IB Business Management Course Companion: toolkit worked example

Product X Product Y Product Z Total

$000 $000 $000 $000

Sales revenue 350 250 400 1,000

Direct costs 100 80 250 430

Allocated indirect 70 50 80 200


costs

Profit 180 120 70 370

Practice question

A company produces three products: Q, R and S. The table below shows the sales revenue and
direct costs for each of these products.

Product Q R S

Sales revenue $240,000 $300,000 $460,000

Direct costs $90,000 $110,000 $190,000

The total indirect costs are $120,000.


Prepare an absorption costing statement using the template below by allocating the indirect
costs based on sales revenue (show all working).

Product Q Product R Product S Total

$000 $000 $000 $000

Sales revenue

Direct costs

Allocated indirect
costs

Profit

© Oxford University Press 2

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