The Process of Absorption Costing - Coursework Example

Therefore, some of the measures that the company should consider include ensuring that the quality of the products is not compromised at any time. This will help maintain the sales levels and the profit margin. Absorption costing, also known as full costing, is a costing technique that value the closing stocks at the fill production cost, including the fixed production costs. This method treats the fixed costs as product costs incurred when the stock has been sold. The cost per unit constitutes both the fixed and the variable production costs.

The process of absorption costing is as follows: gathering the raw data from the financial records, classifying the raw data in respect to the type of expense a process known as coding, cost analysis, determination of the cost centres that provide services to production cost centres, identify product cost centres that are involved directly with the production process and finally overhead absorption. This technique can be applied in different organizations that deal with the production and manufacturing of various products.

For example, the organizations that deal with sales have different costs that can be absorbed using the absorption technique to prepare the financial statements. A manufacturing organization is another example where this technique can be applied to absorb the various overhead costs using the direct costs incurred as the cost centres for allocating the overheads. Absorption costing absorbs the total overheads into production, which generates implications when measuring performance, cost control, and the valuation of stocks.

It is worth noting that the fixed costs do not vary with the level of activity. Therefore this can lead to managers making incorrect decisions about the business operations. Additionally, absorption costing allocates the overhead costs, including the fixed costs, based on the cost driver. This method can be biased in determining the cost driver for each cost, and therefore this poses a challenge to the manager in making good decisions.