Q-21-1RQ - Horngren'S Financial And Managerial Accounting

Question

What is absorption costing?

Step-by-Step Solution

Answer

Answer

 

Absorption costing is the traditional method of calculating product cost per unit.

 

Step 1: Meaning of absorption costing

Absorption costing is the traditional method of calculating product cost per unit and operating income. This method gives equal importance to fixed cost and does not believe in the concept of irrelevant cost or sunk cost.

Step 2: Difference between variable and absorption costing

The main difference is absorption costing and variable costing is that the former method considers fixed manufacturing overhead cost as product cost, whereas the latter method considers it as period cost.