Absorbing Costs Example

The absorbing cost It consists of the incorporation of all the costs generated during the production of a product or service.

The use of absorbing cost is used as a starting method for managers and officials to make the pertinent business decisions.

It is widely accepted by businessmen, accountants, administrators and state officials in fiscal and tax terms.

This method is for external use and it must include the total costs of the production processes regardless of being fixed or variable.

Absorbing costs example:

The company "Dulces PrincalinS.A de C.V" requires sufficient information to know the viability of the last sweets that it introduced to the market, because your sales have been successful, but the final performance has not risen to the desired point in the project initial.

They hope to calculate the gross profit obtained and from this deduct the total costs of production, in order to decide the permanence of the product in the sales repertoire.

The executive in charge deducted the materials and their costs:

• Sugar $ 2,500,000.00
• Flavors $ 23,000.00
• Colorants $ 50,000.00
• Molds $ 30,000.00
• Thickener $ 60.00
• Machinery $ 350,000.00
• Employees $ 890,000.00
• Warehouse $ 30,000.00
• Distribution $ 50,000.00
• Taxes $ 190,000.00
• Ads $ 1500,000.00
• Administrative staff $ 1,500,000.00
• Insurance $ 150,000.00

And it produces a total of $ 6,973,350.00 in production expense.

The total number of pieces produced is $ 10,000,000.00

Which are traded at a price of $ 10.00

The net profit is $ 1,000,000,000.00

To which the production cost of $ 6,973,350.00 is subtracted

Remaining a total net profit of $ 993,026,650.00

With this amount, there will be a clear parameter that will be used to make the corresponding decision.