Traditional Absorption Costing Method: Understanding Cost and Profit Per Product
What is the traditional absorption costing method?
The traditional absorption costing method allocates manufacturing overhead costs according to the amount of final product sold in meals. How does this method calculate cost and profit per product?
Understanding Traditional Absorption Costing Method
The traditional absorption costing method involves allocating all manufacturing overhead costs to products based on the number of units produced. This method assumes that overhead costs are directly related to the number of units produced. Let's break down the cost and profit calculation for each product based on this method:
Calculating Cost and Profit Per Product
1. Chicken:
Cost Calculation:
- Raw material cost: 1,210,257.50 kg x R80.00 / kg = R96,820,600
- Total cost: R96,820,600 + (2,420,515 x R2.00) = R101,661,630
- Cost per unit: R101,661,630 / 2,420,515 = R42.00
Profit Calculation: Selling price R38.00 - Cost per unit R42.00 = (R-4.00)
2. Beef:
Cost Calculation:
- Raw material cost: 1,807,502.50 kg x R110.00 / kg = R198,825,275
- Total cost: R198,825,275 + (3,615,005 x R2.00) = R205,055,285
- Cost per unit: R205,055,285 / 3,615,005 = R56.64
Profit Calculation: Selling price R40.00 - Cost per unit R56.64 = (R-16.64)
3. Vegetarian:
Cost Calculation:
- Raw material cost: 901,051.50 kg x R40.00 / kg = R36,042,060
- Total cost: R36,042,060 + (1,802,103 x R2.00) = R39,646,266
- Cost per unit: R39,646,266 / 1,802,103 = R22.00
Profit Calculation: Selling price R39.00 - Cost per unit R22.00 = R17.00