Introduction to Absorption Costing (Cambridge International AS Accounting)

Spec point — the difference between a cost centre and a cost unit

Introduction to absorption costing

What is absorption costing?

• Absorption costing is a method used to calculate the total cost of production
• In absorption costing, both variable and fixed manufacturing costs are included in the cost of production
• Overheads are assigned to departments to which the costs relate to, then charged to products using an overhead absorption rate

What is a cost centre?

• Cost centres are departments, services, locations, or activities to which a cost can be allocated or attributed to

  • They can be production departments

    • E.g. machining department, finishing department, cutting department

  • Or service departments

    • E.g. maintenance department, canteen

What is a cost unit?

• A cost unit is a unit of output or production to which costs can be charged

• Unit of output which absorbs the cost centre's overhead costs

  • E.g. chair, bicycle, toy, batch of soft drinks, consultation