absorbationskostnad

Absorbationskostnad, often translated as absorption cost, is a costing method in manufacturing that assigns all manufacturing costs to the goods produced. Under this approach, total manufacturing costs include direct materials, direct labor, and both variable and fixed manufacturing overhead. The resulting unit cost is used to value inventory and determine cost of goods sold when products are sold.

Purpose and scope

Absorbationskostnad is used for external financial reporting and inventory valuation under many accounting standards. It ensures that fixed overhead is included in product costs rather than expensed in the period, providing a fuller picture of the cost of production.

Calculation and allocation

To compute absorbationskostnad, determine the period’s total manufacturing costs. Choose an allocation base, such as machine hours or labor hours. Allocate fixed manufacturing overhead to units produced using the chosen base, and add variable overhead based on its cost driver. The per-unit cost equals the total allocated manufacturing costs divided by the number of units produced in the period.

Relation to variable costing

Absorbationskostnad contrasts with variable costing (direct costing), where fixed manufacturing overhead is not allocated to individual units but expensed in the period. Absorption costing includes fixed overhead in inventory, which can affect reported profit depending on production versus sales levels.

Advantages and limitations

Pros include complete cost information for external reporting and inventory valuation, and better alignment of costs with revenues when inventory is sold. Cons include the potential to distort incentives during periods of production volatility, since fixed costs are spread over more units when production increases, possibly masking true profitability.

See also

Absorption costing, variable costing, standard costing, activity-based costing.