Absorption Costing

absorption costing计算Absorption costing计算是一种企业用于成本计算和产品定价的方法。

该方法以所有直接和间接成本作为生产成本的一部分，因此参考了整体产品成本。

这种方法可以帮助企业计算成本，确保产品的定价覆盖所有成本，从而帮助企业获得利润。

下面是如何进行Absorption costing计算的步骤：1. 收集所有生产成本：首先，企业必须收集所有与产品生产相关的成本，包括直接人工、直接材料和间接费用成本。

直接人工成本指生产员工的薪资和工资，直接材料成本指用于生产产品的材料成本，间接费用成本指不直接参与生产但与生产有关联的费用，如设备维护和租金等。

2. 分配间接费用成本：接下来，企业需要将间接费用成本分配到每个产品上。

这通常通过建立一个成本池的方式实现，然后将池子中的费用分配到每个产品上，或者通过使用各种成本驱动器（如工作小时或直接人工成本）来分配成本。

3. 计算总成本：完成分配之后，企业需要将所有成本总和，包括直接成本和间接费用成本，得出总成本。

4. 计算单位成本：为了计算单位成本，企业需要将总成本除以产量，得到每单位成本。

5. 确定产品的定价：最后，企业必须借助Absorption costing计算的结果来决定产品的定价。

它必须考虑成本、竞争和市场需求等因素。

Absorption costing计算是一种全面的成本计算方法，它将所有与产品生产相关的成本都包括在内，使企业在定价时能够覆盖所有成本，确保生产利润。

但是，Absorption costing计算也有一些缺点，如将所有成本分配到每个单位产品上可能会导致某些产品被高估，从而影响企业的决策。

综上所述，Absorption costing计算是一种有效的成本计算方法，可以帮助企业确定产品的正确定价，并确保企业实现利润。

但是，企业必须谨慎地分配所有成本，以确保每个单位产品得到适当估价。

财务管理术语表Absorption costing 吸收成本法：Total Cost Methods全部成本法: 将某会计期间内发生的固定成本除以销售量，得出单位产品的固定成本，再加上单位变动成本，算出单位产品的总成本。

Accounting 会计：对企业活动的财务信息进行测量和综合，从而向股东、经理和员工提供企业活动的信息。

请参看管理会计和财务会计。

Accounting convention会计原则:会计师在会计报表的处理中所遵循的原则或惯例。

正因为有了这些原则，不同企业的会计报表以及同一企业不同时期的会计报表才具有可比性。

如果会计原则在实行中发生了一些变化，那么审计师就应该在年度报表附注中对此进行披露。

Accounts 会计报表和账簿: 这是英国的叫法，在美国，会计报表或财务报表叫做Financial Statements,是指企业对其财务活动的记录。

Chief financial officerAccounts payable应付账款: 这是美国的叫法，在英国，应付账款叫做Creditors，是指公司从供应商处购买货物、但尚未支付的货款。

Accounts receivable 应收账款:这是美国的叫法，在英国，应收账款叫做Debtors,是指客户从公司购买商品或服务，公司已经对其开具发票，但客户尚未支付的货款。

Accrual accounting 权责发生制会计:这种方法在确认收入和费用时，不考虑交易发生时有没有现金流的变化。

比如，公司购买一项机器设备，要等到好几个月才支付现金，但会计师却在购买当时就确认这项费用。

如果不使用权责发生制会计，那么该会计系统称作“收付制”或“现金会计”。

Accumulated depreciation 累计折旧:它显示截止到目前为止的折旧总额。

将资产成本减去累计折旧，所得结果就是账面净值。

Acid test 酸性测试:这是美国的叫法，请参看quick ratio速动比率（英国叫法）。

absorption costing中oar的算法Absorption costing, also known as full costing, is a costing method that allocates all manufacturing costs to the products, including both variable costs and fixed costs. One crucial component of absorption costing is the calculation of the overhead absorption rate (OAR). In this article, we will delve into the algorithm used to determine the OAR in absorption costing.To begin with, we need to understand the concept of overhead costs. Overhead costs are indirect costs that cannot be directly attributed to a specific product or job. These costs include expenses like rent, utilities, and salaries of administrative staff. Since overhead costs are incurred to support the overall production process, they need to be allocated to the products in a logical and systematic manner.The formula to calculate the overhead absorption rate is as follows:OAR = Budgeted Overhead Cost / Budgeted Activity LevelFirstly, we need to determine the budgeted overhead cost. This involves estimating the total overhead expenses for a specificperiod, typically a year. To get an accurate estimate, the company needs to consider all the indirect costs incurred during that period. This could involve collecting data from various departments, reviewing historical trends, and analyzing any changes in the business environment.Once the budgeted overhead cost is determined, we move on to the second step which is calculating the budgeted activity level. The activity level is a measure of the driver or basis used to allocate overhead costs. Commonly used activity levels include direct labor hours, machine hours, or direct material costs. The choice of activity level depends on the nature of the business and the factors that contribute significantly to overhead costs.For example, if a company's primary overhead expense is associated with machine usage, it would be appropriate to use machine hours as the activity level. On the other hand, if direct labor costs are the main driver of overhead costs, direct labor hours would be a suitable activity level.Once the activity level is identified, the company needs to estimate the total activity level for the budgeted period. This involvesanalyzing historical data or making accurate projections based on future demand and production levels. The company may consider factors like seasonal fluctuations, market trends, and planned changes in production capacity to determine the estimated activity level.Finally, we divide the budgeted overhead cost by the estimated activity level to obtain the overhead absorption rate. This rate represents the amount of overhead cost allocated per unit of the activity level. For instance, if the budgeted overhead cost is 100,000 and the estimated activity level is 10,000 direct labor hours, the overhead absorption rate would be 10 per direct labor hour.The overhead absorption rate serves as a basis for allocating indirect costs to products or jobs. For example, if a product requires 2 hours of direct labor to manufacture, it would be allocated 20 (10 x 2) as overhead cost. This overhead cost is then added to the direct costs (e.g., direct materials and direct labor) to determine the total cost of the product.It's important to note that the OAR calculated using absorption costing is based on budgeted figures. However, the actualoverhead costs and activity levels may differ from the budgeted amounts. This discrepancy can lead to under or over absorption of overhead costs. Under-absorption occurs when the actual overhead costs exceed the allocated overhead, whileover-absorption happens when the allocated overhead exceeds the actual costs incurred. These variances need to be carefully analyzed and adjusted to provide a more accurate reflection of the true costs.In conclusion, absorption costing is a costing method that assigns both variable and fixed manufacturing costs to products. The calculation of the overhead absorption rate in absorption costing involves determining the budgeted overhead cost and the estimated activity level. This rate serves as a basis for allocating indirect costs to products and plays a critical role in determining the total cost of production. However, it's important to monitor and adjust for any variances between the budgeted and actual overhead costs to ensure accurate costing and decision-making.。

财务管理术语中英文对照财务管理术语表Absorption costing 吸收成本法：Total Cost Methods全部成本法: 将某会计期间内发生的固定成本除以销售量，得出单位产品的固定成本，再加上单位变动成本，算出单位产品的总成本。

Accounting 会计：对企业活动的财务信息进行测量和综合，从而向股东、经理和员工提供企业活动的信息。

请参看管理会计和财务会计。

Accounting convention会计原则: 会计师在会计报表的处理中所遵循的原则或惯例。

正因为有了这些原则，不同企业的会计报表以及同一企业不同时期的会计报表才具有可比性。

如果会计原则在实行中发生了一些变化，那么审计师就应该在年度报表附注中对此进行披露。

Accounts 会计报表和账簿: 这是英国的叫法，在美国，会计报表或财务报表叫做Financial Statements,是指企业对其财务活动的记录。

Chief financial officerAccounts payable应付账款: 这是美国的叫法，在英国，应付账款叫做Creditors，是指公司从供应商处购买货物、但尚未支付的货款。

Allcation of costs 成本的分配: 将成本分配给“拥有”它们的产品或分部，比如用某产品的广告成本抵减该产品的收入。

Amortization 摊销: 将资产或负债价值的逐渐减少记录在各期费用里。

通常是指商誉、专利或其他无形资产，或者债券的发行费用。

Assets 资产: 企业所拥有的财产，可能包括固定资产、流动资产和无形资产。

Asset turnover: 资产周转率Auditing 审计对公司账簿和会计系统进行检查，从而确认公司的会计报表是否真实、公正地披露其财务状况的过程。

Auditors’report审计报告: 根据法律规定，有限公司每年都应当公布一份会计报表，同时审计师应当出具意见，以确认公司是否对其商业活动进行了真实、公正的披露。

CH9 MARGINAL AND ABSORPTION COSTING1. MARGINAL COST AND MARGINAL COSTINGMarginal costing is an alternative method of costing to absorption costing. In marginal costing, only variable costs are charged as a cost of sale and a contribution is calculated （sales revenue minus variable cost of sales）. Closing stocks of work in progress or finished goods are valued at marginal （variable）production cost. Fixed costs are treated as a period cost, and are charged in full to the profit and loss account of the accounting period in which they are incurred.Marginal cost is the cost of a unit of a product or service which would be avoided if that unit were not produced or provided.The marginal production cost per unit of an item usually consistsSurat is a small business which has the following budgeted marginal costingbudgeted at ￡4,000 per month and absorbed on the normal level of activity of units produced.2. CONTRAST BETWEEN ABSORPTION vs. MARGINAL COSTINGExample :A company sells a single product at a price of ￡14 per unit. Variable manufacturing costs of the product are ￡6.40 per unit. Fixed manufacturing overheads, which are absorbed into the cost of production at a unit rate （based on normal activity of 20,000 units per period）, are ￡92,000 per period. Anyover-absorbed or under-absorbed fixed manufacturing overhead balances are transferred to the profit and loss account at the end of each period, in order to establish the manufacturing profit.（a）Prepare a trading statement to identify the manufacturing profit for Period 2 using the existing absorption costing method.（b）Determine the manufacturing profit that would be reported in Period 2 if marginal costing was used.（c）Explain, with supporting calculations, why the manufacturing profit in （a）and （b）differs.2.1 The cost accounting processThe key issue between absorption costing and marginal costing is how the costs of a business’s input resources are best organized and presented so as to identify individual product/service and total business profit.The choice of costing system may be influenced by the costing method adopted. Specific order costing methods will frequently deploy full absorption costing. One reason for this is that the pricing of each unique piece of work will invariably make reference to the total costs incurred. Continuous operation costing methods are more likely to deploy marginal costing （although this may be in addition to absorption costing）because of the opportunities in such an environment to usecost-volume-profit （CVP）analysis.2.2 Absorption costing principlesIn product/service costing, an absorption costing system allocates or apportions a share of all costs incurred by a business to each of its products/services. In this way, it can be established whether, in the long run, each product/service makes a profit. This can only be a guide. Arbitrary assumptions have to be made about the apportionment of many of the costs which, given that some costs will tend to remain fixed during a period, will also be dependent on the level of activity.An absorption costing system traditionally classifies costs by function. Sales less production costs （of sales）measures the gross profit （manufacturing profit）earned. Gross profit less costs incurred in other business functions establishes the net profit （operating profit）earned.Using an absorption costing system, the profit reported for a manufacturing business for a period will be influenced by the level of production as well as by the level of sales. This is because of the absorption of fixed manufacturing overheads into the value of work-in-progress and finished goods stocks. If stocks remain at the end of an accounting period, then the fixed manufacturing overhead costs included within the stock valuation will be transferred to the following period.2.3 Absorption costing profit statementThe first stage in the preparation of absorption costing profit statements is the measurement of the gross profit （manufacturing profit）earned. This requires the calculation of unit production costs, including the establishment of absorption ratesfor manufacturing overheads.Referring to the example, variable manufacturing costs per units are given in the question （at ￡6.40 per unit）. Fixed manufacturing overheads of ￡92,000 per period are to be absorbed at a unit rate （based on normal production activity of 20,000 units per period）. The fixed manufacturing overhead absorption rate is therefore ￡4.60 per unit （￡92,000 ，20,000 units）giving a total manufacturing cost of ￡11.00 per unit （￡6.40 + ￡4.60）.The use of normal activity as the basis for overhead absorption is similar to the use of budgeted activity. It is to be expected that actual activity （and indeed actual expenditure also）will be different to normal/budget thus giving rise to overhead over or under absorption. It is important that this is highlighted in profit statements. The use of normal （or budgeted）activity and expenditure to establish the absorption rate not only helps to focus attention on overhead recovery but also has the effect of‘normalising’ per unit product/service costs.Fixed manufacturing overheads will be over-absorbed in Period 2 because the actual production of 21,000 units exceeds the normal activity, the basis used to establish the absorption rate, by 1,000 units. The extent of the over-absorption （the balance remaining in the fixed manufacturing overhead account）is, therefore,￡4,600 （1,000 units at ￡4.60 per unit）. This amount will be transferred to the profit and loss account in order to establish the manufacturing profit. It will have a positive effect （i.e., it will be added to profit）because more manufacturing overhead has been absorbed into stock in the period than has been incurred （see the entries in the fixed manufacturing overhead account demonstrated later in examples）.Some candidates wrongly calculated the over/under- absorption based upon the difference between sales and production quantities, rather than upon the difference between actual production and normal production.Preparation of the remainder of the trading statement （to identify the manufacturing profit for Period 2 using absorption costing）should be straightforward （see Example 2）. The manufacturing cost of sales （the transfer out of the finished goods stock account）is simply the 21,600 units sold in the period（which at a selling price of ￡14.00 per unit yields total sales for the period of ￡302,400）multiplied by the unit manufacturing cost of ￡11.00.examination scripts marked）of candidates matching the cost of the goods produced in the period （not the manufacturing cost of the goods sold）with sales.Many examination candidates also got into difficulty because they attempted to introduce stock into the profit statement. There is generally no requirement to do this （unless opening and closing stocks are valued at a different rate per unit）but such an approach should （but often did not）lead to the same profit result.In this example, no details of stock are provided in the question, but it could be assumed, for example, that 3,000 units were in stock at the end of Period I （production of 18,000 units less sales of 15,000 units）. Finished goods stock at the end of Period 2 would then be 2,400 units due to the excess of sales over production of 600 units in that period （see Example 3）.information provided about costs incurred in other business functions （selling, administration, distribution）and thus it is not possible to complete the profit statement. If information on other costs was available, the costs incurred in the period would simply be deducted from the adjusted manufacturing profit to arrive at net profit.2.4 Marginal costing principlesIn product/service costing, a marginal costing system emphasises the behavioural, rather than the functional, characteristics of costs. The focus is on separating costs into variable elements （where the cost per unit remains the same with total cost varying in proportion to activity）and fixed elements （where the total cost remains the same in each period regardless of the level of activity）. Whilst this is not easily achieved with accuracy, and is an oversimplification of reality, marginal costing information can be very useful for short-term planning, control and decision-making, especially in a multi-product business.In a marginal costing system, sales less variable costs （regardless of function）measures the contribution that individual products/services make towards the total fixed costs incurred by the business. The fixed costs （regardless of function）are treated as period costs and, as such, are simply deducted from contribution in the period incurred to arrive at net profit.2.5 Marginal costing profit statementReferring back to Example 1, as there is no information regardingnon-manufacturing costs, it may be assumed that sales less variable manufacturing costs measures contribution. NB. If any variable costs are incurred innon-manufacturing functions then they would also be deducted from sales in the measurement of contribution. （这一点非常重要,务必要深刻理解）The trading statement for Period 2, assuming that a marginal costing system was in place instead, would be as in Example 4.costing approach is more straightforward. The Examiner’s Report noted thatcandidates generally had rather more success with the marginal costing statement in part （b ） than with the absorption costing statement in part （a ）, although some confusion between the two was demonstrated.In practice, the marginal costing profit statement would be completed by the further deduction of fixed costs incurred in other functions.2.6 Profit reconciliationThe net profit reported by absorption and marginal costing systems may not be the same owing to the differing treatment of fixed manufacturing overheads. As has been demonstrated above, whilst marginal costing systems treat fixed manufacturing overheads as period costs （i.e. a charge against profit in the period incurred ）, in absorption costing systems they are absorbed into the cost of goods produced and are only charged against profit in the period in which those goods are sold.As a result, if quantities produced and sold in a period are not the same （i.e., if the levels of work-in-progress or finished goods stock change ）a different profit will be reported by the two systems. The differing profits can be reconciled, and the difference explained, by an analysis of the product of the stock change and the fixed of Example 1:￡69,400 and the marginal costing manufacturing profit of ￡72,160. Absorption costing has a lower profit because more goods are being taken out of stock（including a charge for fixed manufacturing overhead ） than are going into stock. This is demonstrated by the entries in the respective cost accounting systems （fixed manufacturing overhead only ） as in Example .Example2,760 more fixed manufacturing overheads and less profit in absorption costing.NB. The difference in profit between absorption and marginal costing systems is nothing to do with overhead over/under absorption, a popular misconception amongst examination candidates. Despite an over-absorption of ￡4,600, which is a positive adjustment to the absorption costing profit, the profit was nevertheless less than the marginal costing profit.To emphasise again –the difference in reported profit demonstrated above, which can only be a timing difference, is due to changes in the level of finished goods stock which in an absorption costing system moves overhead, and therefore profit, from one period to another. As a general rule:If production quantity > sales quantity then absorption costing profit > marginal costing profit. If production quantity < sales quantity then absorption costing profit <marginal costing profit.Many candidates, when answering examination questions on this topic, do appreciate that the different treatment of fixed manufacturing overhead is the reason for profit differences but they are rarely able to reconcile the profits.。

absorption costing 例子什么是吸收成本法？吸收成本法是一种会计方法，用于计算和分配企业的制造成本和相关费用。

这种方法会将制造和生产过程中的直接成本和间接成本分配到产品上。

即使在暂时无销售的情况下，也能确定每种产品的成本。

吸收成本法将制造费用分为两类：1. 直接成本：生产中与具体产品直接相关的费用，如材料成本、直接人工成本和直接制造费用。

2. 间接成本：与产品制造有关的费用，并且不能直接分配给某个产品，如工厂租金、折旧、电费和管理人员薪资等。

在吸收成本法中，制造企业可以将所有成本分配到产品上。

每个产品的成本不仅包括直接成本，也包括分配后的间接成本。

举例：假设制造商A在三个月内制造了200支相同的手表。

生产成本如下：直接材料成本：$1000直接人工成本：$600间接制造费用：$3000总成本：$4600在吸收成本法下，生产每一个手表的总成本为：此时，如果A只销售了100支手表，则每个手表的成本就是$21。

如果A销售了200支手表，则每个手表的成本是$23：总成本：$4600÷200=$23吸收成本法的优缺点：1. 明确了产品成本，包括直接成本和间接成本。

这对企业来说非常重要，因为它们可以以更具竞争力的价格销售产品，并在企业内部更好地管理和分配资源。

2. 支持企业做出更好的决策，如与产品相关的定价、生产策略。

然而，吸收成本法也有一些缺点，从而有可能导致企业做出错误的决策。

例如：1. 对于那些采用批量生产的制造企业而言，吸收成本法无法准确确定每一个单独的产品成本。

因此，即使某些产品已经过时，企业也可能继续生产，从而延长了不必要的损失。

2. 由于吸收成本法的成本计算不直观，可能会导致企业难以正确计算产品成本，从而得出错误的决策。

3. 吸收成本法难以衡量生产流程的有效性和效率，同时也难以衡量企业成本阮型的可用性。

吸收成本法和Variable Costing的比较：吸收成本法和变动成本法(variable costing)都是制造企业常用的计算制造成本的方法。

ACC2-ManagementAccountingAssignment 1 Essay -Discuss the relative advantages anddisadvantages of traditional absorption costing techniques(absorbing indirect costs on a labour hour basis), and activitybased costingContents1.Introduction …………………………………………………...…..2.Absorption costing…………………….…………………….……..…2.1 Definition……………………………………………….…..2.2 Background …………………………………………………..2.3 Approach ………………………………………………….….3.Activities based costing (ABC)……………………………………...3.1 Definition…………………………………………………...3.2 Background…………………………………………………...3.3 Approach…………………………………………………..4.The different between traditional absorption costing and ABC…...4.1 Allocation, apportionment and absorptions rate…………..4.2 Approach………………………………………………..….4.3 Methodology…………………………………………...…..4.4 Legal validity……………………………………………….4.5 Range………………………………………………….…….4.6 Advantages of absorption costing……………………..…..4.7 Disadvantages of absorption costing…………………..……4.8 Advantages of ABC…………………………………..….….4.9 Disadvantages of ABC………………………………….…...5.Conclusion……………………………………………………………6.References…………………………………………………………….7.Bibliography……………………………………………………….. 2 2 2 2 2 3 3 3 3 3 3 4 4 4 4 5 5 5 5 5 6 61.IntroductionNo matter tradition absorption costing or Activities based costing, they both are important component for companies because these are the management methods for accounting to calculate the costs, which can let the companies know the operating costs of the business. Generally speaking, both of them are use to trace indirect cost to cost object because not all overheads can be charged to cost object directly. This essay is going to describe the advantages and disadvantages of traditional absorption costing and activities basis costing (ABC). It will be separated three parts, the first part is the information about traditional absorption costing and ABC, which included the definition, background, and working process.; the second part is the difference between traditional absorption costing and ABC, which shows the advantages and disadvantages for these costing technique, compare with each other, and give the reasons for how suitable for those companies; and the final part is conclusion of this article.2.Absorption costing2.1DefinitionKilgour (2005) stated that, ‘In absorption costing, all production costs are absorbed into products and the unsold stock is valued at total cost of production.’ It means the units produced absorbed all of the manufacturing costs, which include direct materials, direct labour, and both variable and fixed manufacturing overhead. In addition, the traditional costing system is charged indirect cost based on labour hour. Therefore the company need to use them to analysis the costs and give the information for guidance of management, which the usage of absorption costing is for cost control purpose.2.2BackgroundObviously since the early 1900s, traditional costing systems have been developed which was charged the overhead to product by using basic apportionment and now are still widely used. Although some accountants say ABC is better, it depends on the type of company.2.3ApproachThe working process of Absorption costing, firstly, to charge all manufacturing overheard to production and service cost centre; secondly, to reallocate the service cost centre to production cost centre; thirdly, to calculate the overhead rate for each production cost centre; At last, put the cost overhead to product.3.Activities based costing (ABC)3.1DefinitionKilgour (2005) stated that, ‘Activity based costing (ABC) is a method of costing which identifies the factors which cause costs and charges costs to output based on the usage of those factors.’ In other word, it charges indirect costs of all the activities to cost object accurately, for example, manufacturing, engineering or planning. In addition, ABC gives helpful data to managers so that they can follow the figures which show the profitable or unprofitable of the business activities in decision-making for the company.3.2BackgroundABC was developed in the late 1980s, actually it was not focused when it implemented although it tried to instead of the traditional costing system.However, now is more and more companies use this method because the world has changed, for instance, larger and larger numbers of businesses, product ranges, production technology and practice, more support activities and so on.3.3ApproachThe working process of ABC, at first it needs to confirm the major activities;secondly, identify influence cost level (cost drivers ); thirdly, check through costs on basis of cost drivers (cost pools); fourthly, calculate cost per unit of cost driver and finally charge costs to product which based on cost driver used.4.The different between traditional absorption costing and ABC4.1Allocation, apportionment and absorptions rateEven though both traditional absorption costing and ABC are tracing indirect cost to cost object, they are still have difference. Firstly, in cost allocations or cost apportionment that assigned indirect costs to cost objects. These techniques show difference in the two-stage absorption process, especially in allocation and apportionment which are second part in the first stage. Allocation is where directly charges the overhead to the cost object without any help for apportioning the cost. However, apportionment is where apportions the base type of overhead which is mentioning, for example each cost centre using floor area occupied the apportionment of rent and rates. Obviously in the second stage (charge bases cost driver), traditional costing systems use a small number of allocation bases, especially machine hours or direct labour hours, however, ABC is used a larger number of cost centre in first stage and a greater number in second stage.Moreover, in the second stage which include absorption rates that use total overheads of cost centre divided by the units or labour hours or machine hours. Itshows the different rate about different costs directly.4.2ApproachSecondly, different in approach, the costs is allocated to product units by absorption costing, by contrast, ABC charges the costs of product units. Absorption costing is a traditional costing technique which focuses on the fixed cost of product or service, it can allocate the resource, product or service directly. However, ABC is a modern cost accounting technique, which is based on the activities. Therefore ABC works out products, service consume activities and resource consumption, so that it transacts indirect cost to direct cost.4.3MethodologyYet another, different in methodology, absorption costing differentiates the fixed overhead costs with the numbers of product units but ABC confirms the actual proportion of fixed overheads costs by product unit. Additionally, ABC is more scientific approach than absorption costing and gives accuracy data.4.4Legal validityMoreover, different in legal validity, absorption costing is legal to publish financial statement by Financial Accounting Standards Board (FASB) and Internal Revenue Service (IRS), however ABC do not be accepted by these two association.4.5RangeFinally, different in range, absorption costing is helpful to identify whether the manufacturing overall profitability or efficiency but weak at showing real cost of individual products units. However, ABC tenders the real costs of individual product units. As the result of fact, ABC is suitable for large and multi- product operations because of quality of management accounting information. Moreover, absorption costing is suitable for small firms and similar enterprises products or services.4.6Advantages of absorption costingThis technique which is accepted by Inland Revenue as stock that is not undervalued. Be using frequently to prepare financial account which shows to external department as annual report. Add up all costs, for example, direct labour hours, machine hours.4.7Disadvantages of absorption costingNot easy to control and compare costs, because it contains both variable cost and fixed cost. Not much useful for management decision making, planning and control. Because it is not big value for the total cost, manager uses his intuition for decision making.4.8Advantages of ABCShows the complexity of production, as ABC has a huge system for calculating those activities costs, not matter how complexity it is. Concentrate on cause of costs, ABC insists on using cause -and- effect cost allocations, so it can improve the accuracy in the process while is charging overhead to cost object. Easy for decision making, as the data accuracy, it is essay for manager make decisions.4.9Disadvantages of ABCComplexity, ABC has huge cost pools and cost drivers which need to spend more Expensive to operate, because of the complexity system, it needs more process to prove the figures. Difficult to trace, it is not usually show the product should carry the traced overhear. To choose cost drivers, because ABC depends on cost driver, it means each complexity activity is based on cost driver. Cost may higher than benefit, so that it is mostly used for big companies.5.ConclusionTo briefly summarise, this essay focuses on the different between absorption costing and activities based costing. On one hand, it gives main information about these two techniques such as background, absorption costing was developed in 1900s whereas ABC was implemented in 1980s which developed by a group of accountant. On the other hand, it showed the advantages and disadvantages of absorption costing and ABC, for example, ABC is too complexity and more expensive, but it focuses on cause of costs and easy for decision making. Moreover, absorption costing uses to prepare the financial account, but it not convenient to manager look at the total costs of the company and decision making. To contrast about these methods, ABC is more expensive than absorption costing but it gives more accurately data, therefore this technique is more suitable to big company which has a large numbers of activities.6.ReferencesKilgour, D. (2003) Introduction to Management Accounting-Heriot-Watt Management Programme.7.BibliographyDrury, C. (2008) Management and cost accounting. 7th ed. London: South-Western. Lucey, D. (2009) COSTING. 7th ed. London: South-Western Cengage Learning. Nayab, N. (2010)Absorption Costing vs. Activity- Based Costing. [online] Available from:/office/finance/articles/86649.aspx[Accessed 8th January 2010]。