Absorption costing:Statement of Profit or Loss

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Absorption costing:Statement of Profit or Loss

Cambrige AS and A Level Accounting Notes (9706)/ ZIMSEC  Advanced Accounting Level Notes: Absorption costing:Statement of Profit or Loss

  • Profit is the overriding aim of most businesses and for this reason management accountants do also prepare income statements (also known as statement of profit or loss)
  • Although similar in spirit to the Income Statement prepared by Financial Accountants it is a little different as will be shown below
  • The statement is usually prepared on a monthly basis and its objective is to show whether profit is higher or lower than expected
  • If there is a difference, as is usually the case, the reasons for the differences are ascertained
  • Absorption costing values each unit of inventory at the cost incurred to produce the unit
  • Under absorption costing overheads are included in the cost of each unit which means the cost of sales, opening and closing inventory all include a portion of overheads for the period
  • To reiterate each unit is assigned its share of fixed overheads for the period
  • In accounting term we say each unit absorbs its share of fixed overheads for the period

The format of an Absorption Costing Statement of Profit or Loss

$$
Salesxxx
Less Cost of Sales
Opening inventoryxx
Variable cost of productionxxx
Fixed overhead absorbedxxx
Less closing inventory(xx)

(xx)

xxx
(Under)/Over-absorption

(xx)/xx

Gross Profitxx
Less Non-production costs(xx)
Profit/(Loss)

xx/(xx)

  • Valuation of inventory -opening and closing inventory are valued atfull production cost under absorption costing
  • Under/over-absorbed overhead -over-absorption of overheads is necessary in absorption costing statements
  • Absorption costing statements are split into production costs in the cost of sales and non-production costs after gross profit
  • A worked example for Absorption costing can be found here

To access more topics go the ZIMSEC Advanced Level Accounting page

To access more topics go to the Cambridge AS/A level page

By |2018-08-11T09:14:49+00:00August 11th, 2018|Cambridge AS A Level Accounting, Notes, ZIMSEC A Level Accounting|Comments Off on Absorption costing:Statement of Profit or Loss

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He holds an Honours in Accountancy degree from the University of Zimbabwe. He is passionate about technology and its practical application in today's world.
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