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The total manufacturing costs per unit is known as Absorption cost per unit . To calculate Absorption cost we use following formula-
Absorption cost per unit = (Direct Material Costs + Direct Labor Costs + Variable Manufacturing Overhead Costs + Fixed Manufacturing Overhead Costs) / Number of units produced
Absorption costing is an accounting method designed to capture all of the costs that go into manufacturing a specific product. Absorption costing considers direct materials, direct labor, variable manufacturing overhead and fixed manufacturing overhead as product costs.
How to calculate absorption costing-
1. Develop cost pools-First, determine the costs associated with the production of a product and then assign them to different cost pools.
2. Determine usage for each cost-Next, go through every activity and figure out the amount each was used during production.
3. Calculate the costs-Lastly, calculate the allocation rate, which tells you the cost per unit. You can do this by following this formula:
Absorption cost per unit = (Direct Material Costs + Direct Labor Costs + Variable Manufacturing Overhead Costs + Fixed Manufacturing Overhead Costs) / Number of units produced
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