How does the absorption cost method calculate the cost?

The relevant calculation formula under the absorption cost method is as follows:

Calculation of product cost: product cost = direct material+direct labor+manufacturing cost = product cost/current output, period cost = sales cost+management cost+financial cost (three period costs: the sum of variable cost and fixed cost).

Calculation of cost of goods sold: current cost of goods sold = unit production cost * current sales volume (when the initial inventory is zero).

Calculation of operating profit: (1) sales revenue-sales cost = sales gross profit (2) sales gross profit-sales expenses-management expenses-financial expenses = operating profit.

Calculation of cost of sales: cost of sales = cost of goods sold in the current period = inventory cost at the beginning+production cost incurred in the current period-inventory cost at the end of the period.

The absorption cost method is also called the total cost method, the inductive cost method or the absorption cost method.

When calculating the product cost and inventory cost, the absorption cost method classifies all costs such as direct materials, direct labor, variable manufacturing expenses and fixed manufacturing expenses consumed in the production process in a certain period into product cost and inventory cost. Because the absorption cost method absorbs all the manufacturing costs, whether fixed or variable, into the unit product, this method is also called "inductive (or absorption) cost method".

In the calculation of absorption cost, the unit product cost is directly affected by the output. The greater the output, the lower the unit product cost, which can stimulate enterprises to improve the enthusiasm of product production. But this law is not conducive to the cost management and short-term decision-making of enterprises.

References:

Absorption cost method-Baidu encyclopedia