Advantages Of Absorption Costing

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Absorption Costing System Absorption costing is a managerial accounting cost method where it gathers all of the manufacturing expenses and allocate them to the actual product. In other words, it means that all the expenses incurred with the production, such as all the raw materials that is required to make the product, the direct labor needed in producing the product and both variable and fixed overhead costs, are all involved in the final cost of the product. For example, think about it like this, if Panasonic used absorption costing systems when they are setting a value for their hair dryer, the cost of the product would comprise the following: the raw materials needed to manufacture the hair dryer, the wages paid to employees to produce…show more content…
Expenses from the administration are not part of the manufacturing so they are being reported separately in the financial statement. It is being shown as operating expenditure in the financial statements. Another main feature is that absorption costing is used in pricing decisions to compute the selling price of the product by adding the profit in the total cost. Advantages of Absorption Costing: One of the main advantage is that, Absorption costing acknowledges the importance of including fixed cost of operation. It includes into account all the cost of production, not only the direct costs but also the fixed cost that involved in the manufacturing such as utility bill, property rentals and salaries for the employees. By having a complete picture of the cost per unit for a product can be very useful for the management to assess the profitability and decide the prices for an individual…show more content…
In other words, Just in time inventory refers to an inventory management system where inventory are readily available at the time when its needed in the production process to meet the demand but not to a point of excess where it is need to stockpile the extra inventory. Inventory maintenance takes time and it could turn to be expensive, this is what motivates industries to implement Just in Time programs. For example, to understand better, lets assume that Company A is a small car manufacturer, On Wednesdays they assemble the car bumpers, and on Fridays they set the windshields. If the company is using just in time inventory method then the company might have the parts delivered exactly one day prior to the requirement. So, the bumper would arrive on the Tuesday and the windshields on Thursday. Features of JIT: Some of the key features of this system are that only few reliable vendors exist, who can deliver high quality raw materials within a short period that to in perfect condition. Secondly, since there will not be any stockpiling, the transportation cost that is involved in the movement of inventory from the storage unit to the manufacturing site can be avoided. And the other feature is that the production cycle gets shorter, the reason being disturbance due to delays
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