Prepare a short report containing an evaluation of both the absorption costing system and the relevant costing system

Short report on the evaluation of Absorption Costing and Relevant Costing

FROM          : Accounting Student

TO               : Accountant

DATE           : Tuesday 19 January 2021

RE                : Evaluation of Absorption Costing and Relevant Costing

1. Product Cost :

Absorption Costing = Variable manufacturing costs + Fixed manufacturing costs

Relevant Costing = Variable manufacturing costs only

2. Period Costs :

Absorption Costing = All Non- Manufacturing Costs

Relevant Costing = All Non- Manufacturing Costs + Fixed Manufacturing Costs

3. Gross Profit / Contribution

Absorption Costing = Calculates Gross Profit (Sales - Production Costs)

Relevant Costing = All Non- Manufacturing Costs + Fixed Manufacturing Costs

Signed

Accounting Student

Date 1/19/2021

Explanation:

Absorption costing is also known as full costing. All manufacturing costs are included in the Product Cost. This is most suitable for external reporting and acceptable for IFRS and GAAP.

Relevant costing is also known as Direct or Variable costing. Only Variable manufacturing costs are included in Product Costs. This costing method is for internal purposes and is used by Managers for decision making.

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