Cambrige AS and A Level Accounting Notes (9706)/ ZIMSEC  Advanced Accounting Level Notes: Absorption costing:Statement of Profit or Loss

  • Profit is the overriding aim of most businesses and for this reason management accountants do also prepare income statements (also known as statement of profit or loss)
  • Although similar in spirit to the Income Statement prepared by Financial Accountants it is a little different as will be shown below
  • The statement is usually prepared on a monthly basis and its objective is to show whether profit is higher or lower than expected
  • If there is a difference, as is usually the case, the reasons for the differences are ascertained
  • Absorption costing values each unit of inventory at the cost incurred to produce the unit
  • Under absorption costing overheads are included in the cost of each unit which means the cost of sales, opening and closing inventory all include a portion of overheads for the period
  • To reiterate each unit is assigned its share of fixed overheads for the period
  • In accounting term we say each unit absorbs its share of fixed overheads for the period

The format of an Absorption Costing Statement of Profit or Loss

Less Cost of Sales
Opening inventoryxx
Variable cost of productionxxx
Fixed overhead absorbedxxx
Less closing inventory(xx)




Gross Profitxx
Less Non-production costs(xx)


  • Valuation of inventory -opening and closing inventory are valued atfull production cost under absorption costing
  • Under/over-absorbed overhead -over-absorption of overheads is necessary in absorption costing statements
  • Absorption costing statements are split into production costs in the cost of sales and non-production costs after gross profit
  • A worked example for Absorption costing can be found here

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