Absorption Costing | Theory for CA Inter | Nov, 2022 (Part 2)
Absorption Costing or Absorption Cost Accounting is also known as Overheads Costing. Lets learn absorption costing with example and make Cost and Management accounting simple in Hindi + English.
In this chapter we will learn the difference between absorption costing and Marginal / Variable costing which is explained through various method
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INTRODUCTION
Overheads are the expenditure which cannot be conveniently traced to or identified with any particular cost unit. Such expenses are incurred for output generally and not for a particular work order e.g., wages paid to watch and ward staff, heating and lighting expenses of factory etc. Overheads are also very important cost element along with direct materials and direct employees. Often in a manufacturing concern, overheads exceed direct wages or direct materials and at times even both put together. On this account, it would be a grave mistake to ignore overheads either for the purpose of arriving at the cost of a job or a product or for controlling total expenditure.
Overheads also represent expenses that have been incurred in providing certain ancillary facilities or services which facilitate or make possible the carrying out of the production process; by themselves these services are not of any use. For instance, a boiler house produces steam so that machines may run and, without the generation of steam, production would be seriously hampered. But if machines do not run or do not require steam, the boiler house would be useless and the expenses incurred would be a waste.
Overheads are incurred not only in the factory of production but also on administration, selling and distribution.
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