Product costing: absorption costing

This chapter looks at the basic building blocks of management accounting information: costs. It considers what costing involves, what types of cost a business will incur in its operations, and how this costing information is used to inform that most critical management decision: what prices to charge for products and services so that an organization can make a profit. Construction of simple costing statements to determine the total cost of products on an absorption costing basis is illustrated. The chapter also provides instructions on how to draw simple graphs to illustrate fixed, variable, and total cost behaviour in a business context. At the latter part, it explores the assumptions on which costing is based.