Absorption Costing

Absorption Costing Income Statement

Format

Absorption Costing Income Statement

Revenue                                         £X
Less: Cost of sales
  Opening inventory (units × full cost)         X
  Add: Production cost (units × full cost)      X
  Less: Closing inventory (units × full cost)  (X)
                                               ----
  Cost of sales (before adjustment)             X
  Less: Over-absorption / Add: Under-absorption X
                                               ----
Cost of sales                                   X
                                               ----
Gross profit                                    X

• Full cost per unit = variable production cost + fixed overhead per unit (OAR)
• Inventory is valued at full production cost (includes the fixed overhead element)
• Over-absorption is deducted from (reduces) cost of sales; under-absorption is added

Worked Example — Holbrook Ceramics Ltd (September)

OAR = £7 200 ÷ 1 200 = £6.00 per unit Full cost per unit = £18 + £6 = £24 Closing inventory = 150 + 1 400 − 1 350 = 200 units Overhead absorbed = 1 400 × £6 = £8 400 → over-absorbed by £1 200 (£8 400 − £7 200)

Revenue          1 350 × £45          £60 750
Opening inv      150 × £24   £3 600
Production       1 400 × £24 £33 600
Closing inv      200 × £24  (£4 800)
                            -------
Cost of sales (before)       £32 400
Less over-absorption         (£1 200)
                            -------
Cost of sales                £31 200
                            -------
Gross profit                 £29 550