Absorption of Non Production Overheads in Production Cost
Product costs may be compiled for a range of purposes including
a) Stock valuation
b) Product pricing
c) Decision making
For stock valuation purposes International Accounting Standard No. (2) two define cost being such expenditure that has been incurred in the normal course of business in bringing the product or service to its recent situation and location. This expenditure must involve in addition to the cost of purchase those costs of conversion as are suitable to that location and situation. Costs of conversion involve production overheads and other overheads attributable in the specific circumstances of the business in bringing the product or service to its recent location and situation
For product pricing reasons, administration, distribution and selling overheads may be absorbed in a number of ways involving
a) Like a percentage of selling price
b) Like a percentage of full cost of production
c) Like a percentage of conversion costs
d) Like a rate per unit sold
For decision making reasons it is relevant also to identify that part of administration distribution and selling overhead costs are directly attributable to a particular product and that are avoidable if such product is discontinued.