The document explains absorption costing and its distinction from marginal costing, detailing the classification of costs involved in manufacturing. It discusses various cost types such as fixed, variable, direct, indirect, and product costs, and presents an example from Sahani Limited's first year of trading, comparing profit statements derived from both costing methods. Additionally, it highlights advantages of absorption costing, such as effective stock valuation and pricing policy.

1. Absorption Costing
Presented By:
Shiva Sahani
Bimarsh Raj Giri
(MBA II Semester)

2. Introduce Raw
Material
Manufacture
Product
Store Finished
Goods
Sell Finished
Goods
• Direct material
are purchased
• Direct materials
are placed into
production
• Direct
Labour
applied to the
product
• Overhead
costs
incurred
• Production
process
completed
• Goods are
shipped for
sales
Manufacturing
Process

3. Classification of Cost
Fixed Cost: Cost that doesn’t change with increase or decrease in the
number of goods or services produced or sold.
Variable Cost: Cost that changes in proportion with production
output.
Direct Cost: Cost that can be completely assigned to the production of
specific goods or services.
Indirect Cost: Cost that cannot be assigned to a cost object

4. Period Cost:
Cost that cannot be appointed to the product and it is charged
to the period in which they arise.
Example: Selling and Administration Costs like Rent and
Salary
Product Cost:
Cost that is attributable to the product i.e. the cost is traceable
to the product and is a part of inventory values.
Example: Direct Material, Direct Labour Factory Overhead etc.

5. Absorption Costing
It is the costing system which treat all the manufacturing
costs including both the fixed and variable costs as product
costs.
It is also referred as Full Costing.
It is used to calculate profit and valuation of inventory.

6. Total Cost
• Variable Non-
Manufacturing Overheads
• Fixed Non-Manufacturing
Overheads
Product Cost Period Cost
• Direct Materials
• Direct Labour
• Direct Expenses
• Variable Manufacturing
Overheads
• Fixed Manufacturing
Overheads
Absorption
Costing

7. Marginal Costing
It is the costing system which treat only the variable
manufacturing costs as product costs.
It is used to help with short term decision making i.e.
break-even analysis, margin of safety etc.

8. Total Cost
Product Cost Period Cost
• Direct Materials
• Direct Labours
• Direct Expenses
• Variable Manufacturing
Overheads
• Fixed Manufacturing
Overheads
• Variable Non-
Manufacturing Overheads
• Fixed Non-Manufacturing
Overheads
Marginal Costing

9. Sahani Limited commenced business on 1 January 2019. It manufactures a
special type of chair designed to alleviate back pain. Information on the first
year’s trading is as follows:
Number of chairs manufactured 5,000
Number of chairs sold 4,500
Selling price Rs 110 per chair
Direct materials Rs 30 per chair
Direct labor Rs 40 per chair
Fixed production overheads Rs 100,000
The directors ask for your help in producing profit statements using the
marginal costing and absorption costing methods. They say that they will use

10. Marginal Costing Absorption Costing
Sales Revenue @ 110 each (A) 495,000 495,000
Variable Cost
Direct Material @ 30 each 150,000
Direct Labour @ 40 each 200,000
350,000 350,000
Less: Closing Inventory (Marginal Costing)
500 Chairs @ 70 each 35,000
Fixed Production Overhead 100,000 100,000
Less: Closing Stock (Absorption Costing)
500 Chairs @ 90 each
45,000
Cost of Sales (Marginal Costing) 415,000 405,000
Profit 80,000 90,000

11. Advantages of Absorption Costing
• The absorption costing ensures that all the costs are
covered for stock valuation
• Efficient Pricing Policy
• It is essential for the purpose of external reporting
• There is no need of segregation the cost into fixed and
variable
• Absorption costing makes managers more responsible

12. Thank You