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Finance: What is Absorption Costing? 0 Views
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Description:
What is Absorption Costing? Absorption costing is an accounting method compliant with GAAP that factors all costs related to the manufacture of a product and expenses them individually instead of as a cumulative sum. This method separates inventory overhead from manufacturing overhead to more accurately reflect cost of goods sold.
- Social Studies / Finance
- Finance / Financial Responsibility
- College and Career / Personal Finance
- Life Skills / Personal Finance
- Finance / Finance Definitions
- Life Skills / Finance Definitions
- Finance / Personal Finance
- Courses / Finance Concepts
- Subjects / Finance and Economics
- Finance and Economics / Terms and Concepts
Transcript
- 00:00
Finance Allah shmoop what is absorption costing Okay There has
- 00:08
to be a sponge here somewhere Paper towels a mop
- 00:12
And what's being absorbed anyway Answer overhead Capital costs direct
- 00:17
costs indirect costs variable cost fixed costs like everything So
- 00:21
when you might hear that given airplane cost eight million
Full Transcript
- 00:24
bucks to produce Well nice corporate jet there You have
- 00:26
to ask What do you mean by cost Cost to
- 00:30
produce What were those costs like Was that just the
- 00:33
gross cost of the physical parts of the airplane Like
- 00:36
the engine the fuse lodge the electrical systems controls fuel
- 00:40
management rich Corinthian leather seats plus labor to assemble them
- 00:44
Is that what you meant by costs Is that what
- 00:46
you've included in that eight million dollar figure Or did
- 00:49
you include all the other crap that needs O R
- 00:52
Sucks up cash to produce one unit of an airplane
- 00:55
What about the forty million dollars a year your company
- 00:57
spends on lobbyist with the FAA being sure that your
- 01:00
plane gets properly certified and is in fact legally allowed
- 01:04
to fly You make eighty planes a year so that
- 01:06
forty million on average is well five hundred grand A
- 01:09
plane was that five hundred grand included in the eight
- 01:12
million dollar figure you just quoted Was it absorbed in
- 01:16
the cost figure What about rent on the building in
- 01:19
which the plane was assembled For the myriad lawyers who
- 01:23
you know lawyer stuff or the interest costs on the
- 01:25
capital you borrowed TIO start the company in the first
- 01:28
place or the union pension fund cost for the people
- 01:32
who labor to assemble the plane Was that included Well
- 01:35
when you start adding up all these other costs on
- 01:37
an eighty planes a year manufacturing schedule will the plane
- 01:41
as an individual product then would quote absorb unquote all
- 01:45
of these other costs exogenous to the unit cost of
- 01:49
building that one plane And instead of costing eight mil
- 01:53
well it's fully absorbed Cost might be more like twelve
- 01:57
thirteen fourteen million bucks Yeah big difference Big plane Big 00:02:01.58 --> [endTime] fuzzy dice
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