Question
A manufacturing firm allocates factory rent, supervisor salary, depreciation of plant, direct materials, and direct labour to each unit produced while computing product cost. Which costing method is the firm following?
Solution
Absorption costing (also known as full costing) assigns all manufacturing costs, both fixed and variable, to units of production. This means that direct materials, direct labor, variable overhead, and fixed overhead (like factory rent, supervisor salary, depreciation) are included in product cost. It contrasts with variable costing, which only assigns variable costs to production and treats fixed costs as period expenses.
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