How Absorption costing Works

How Absorption costing Works

The absorption costing build a product cost by allocation , apportionment and overhead absorption.

1.Direct Allocation

in first place direct expenditure are allocated to appropriate cost center. The examples of direct allocation is direct material and direct labour and direct overheads.

2. Apportionment

Apportionment involves two steps . in first place the general overhead which are charged to production and service department cost centers by using appropriate bases.

in second place the service department general overheads are charged to production department.

3. Absorption

Finally the general heads are charges to production cost by an absorption rate.