Main stages for computing the total cost per unit

Question

Briefly explain the main stages for computing the total cost per unit under the absorption costing system.

Answer 1

Absorption costing is cost accounting system in which the overheads of the organization are charged to production by means of the procedure of absorption. Costs are first assigned or apportioned to the cost centers, where they are absorbed in the cost unit using absorption rates (Law, 2012, p. 2). There are three main stages as follows which are illustrated below:

• Collect indirect costs in cost centers on the basis of apportionment or allocation

• Find out the overhead absorption rate (or OAR) for each and every production cost centre (for example cost per direct labor hour)

• Compute cost per unit.