Question

In: Accounting

Describe the absorption costing income statement format. What is the benefit of using this income statement...

Describe the absorption costing income statement format. What is the benefit of using this income statement format for decision making purposes?

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Expert Solution

Absorption Costing Income Statement Format-

Sales XXX

Production Costs:

Direct Material Consumed XXX

Direct Labor Cost XXX

Variable Manufacturing Overheads    XXX

Fixed Manufacturing Overheads XXX

Cost of Goods Produced XXX

Add: Opening stock of finished goods XXX

Cost of Goods Available for sale XXX

Less: Closing stock of finished goods XXX

Cost of goods sold XXX

Add: Selling and administrative costs XXX

Administrative costs XXX

Total Costs XXX

Profit ( Sales - Total Cost ) XXX   

Explanations:

Initially cost of production is calculated which includes direct material cost, direct labor cost, and manufacturing overheads (both variable and fixed). Then after adding opening stock, total cost of goods available for sales is obtained. Then Closing stock is subtracted which gives cost of goods sold. Here main thing to identify is proportional fixed costs on the Closing stock is also subtracted which ultimately gets transferred to the next period as a result of which we get the cost of units sold only unlike the variable costing in which complete fixed costs are taken into the account.

Then selling and administrative expenses are added to the cost which gives the total cost of sales.

Advantage of using this in decision making process is that it takes into account the proportionate fixed costs of production only which enables the producer to compare the actual cost of goods sold with the revenue rather than using the complete fixed costs to evaluate the profit.  


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