How to Calculate Inventoriable Cost Using Absorption Costing: Including all Direct and Indirect Costs in Production Costs.

inventoriable cost using absorption costing

Direct materials + direct manufacturing labor + variable manufacturing costs + portion of fixed costs

Absorption costing is a method of accounting that includes all of the direct and indirect costs incurred in producing a product or service into the cost of that product or service. The inventoriable cost under absorption costing includes the direct materials, direct labor, and both variable and fixed overhead costs that are used in the production of a product. This is in contrast to variable costing, which includes only the variable costs, such as direct materials, direct labor, and variable overhead, in the cost of a product.

To calculate the inventoriable cost using absorption costing, you would need to calculate the total manufacturing cost, which includes the direct materials, direct labor, variable overhead, and fixed overhead. The fixed overhead costs are allocated to the various products produced based on a predetermined overhead rate, which is calculated by dividing the total estimated fixed overhead costs by the estimated amount of the allocation base, such as direct labor hours, direct labor dollars, or machine hours.

Once the total manufacturing cost has been calculated and the fixed overhead costs have been allocated to the products, the inventoriable cost can be calculated by adding the total manufacturing cost to the beginning inventory and subtracting the ending inventory. This calculation ensures that the cost of goods sold includes all of the costs incurred in the production of the goods, both variable and fixed.

In summary, the inventoriable cost using absorption costing includes the direct materials, direct labor, variable overhead, and fixed overhead costs that are used in the production of a product. This method of accounting ensures that all of the costs of production are included in the cost of the product, providing a more accurate picture of the true cost of producing the product.

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