Business Studies

• Absorption costing is a traditional method of costing that allocates all manufacturing costs to the cost of a product, including direct costs such as material, labour, and overhead costs. In this method, fixed overheads are absorbed into the cost of production.

Numerical example:

Let’s assume […]

1. Direct Cost: Direct costs are costs that can be traced back to a specific product or service. Examples include raw materials and labour costs.
2. Indirect Cost: Indirect costs are costs that cannot be easily traced back to a specific product or service. Examples include rent, utilities, and administrative expenses.

• Production costing refers to the process of calculating the cost of manufacturing a product or providing a service.
• It involves identifying all the expenses incurred during the production process, including direct and indirect costs, in order to determine the total cost of producing a product.