Absorption Costing (AC) and Activity- Based Costing (ABC) for Inventory Freight | Transportation

---

Absorption costing is traditional costing method while Activity- Based Costing ( ABC) is modern costing method. Absorption costing is simple way and less time consuming for calculation, but Activity-Based Costing ( ABC) is complex way and more time consuming. Activity-Based Costing ( ABC) is more accurate than Absorption costing (AC).

In practice, we can use both methods. Small amount we may use Absorption costing (AC) while large amount we will use Activity-Based Costing ( ABC). How much small or large amount is based on your business nature and judgment.

Cost of inventory = purchase price – trade discount + transportation in + insurance cost + importation tax + specific tax ( if any) + handling cost + port cost + clearance cost + other relevant costs

In our example, we will use both methods ( AC and ABC) for allocating cost of transportation in ( freight in /delivery) to cost of inventory.

Example

We have total costs $2,000 for freight in (transportation in) of following inventory.

Goods	Units	Kg
A	500	1,000
B	200	600
C	300	300
Total	1,000	1,900

 

Assume that transportation cost is based on kilogram of inventory.

Required:

1. Total cost of each inventory based Absorption Costing (AC)
2. Total cost of each inventory based on Activity Based Costing (ABC)

Solution

1. Total cost of each inventory based Absorption Costing (AC)

Transportation Absorption rate per unit = $2,000/1,000=$2/unit

Goods	Transportation cost	Calculation
A	$1,000	500 x $2
B	$400	200 x $2
C	$600	300 x $2
	$2,000

2. Total cost of each inventory based on Activity Based Costing (ABC)

Goods	Transportation cost($)	Calculation
A	$ 1,052.63	1,000/1,900 x $2,000
B	$  631.58	600/1,900 x $2,000
C	$  315.79	300/1,900 x $2,000
	$ 2,000

So total cost of each inventory is different figure based on each method.

Phnom Penh HR Promotion

Phnom Penh HR is the best recruitment and consulting in Cambodia and Asia.

***How to Post Job Announcement Free on Phnom Penh HR

There are the following three simple steps:

1. First Step- Go to website: www.pp-hr.com
2. Second Step – Click Menu: Register
3. Third Step-Click Menu : Post Job Free

***Phnom Penh HR Services:

• Recruitment Service : Help to find qualified candidates fast and right position.
• Cambodia Tax Consulting: Help to reduce tax risk.
• Accounting Service Preparation: Help to make proper and timely financial statements.
• Outsourcing service : Help to reduce company complexity.
• Internal Auditing Service : help to reduce fraud, error and improve work quality.

*** Phnom Penh HR services by ACCA | CPA, Diploma in Cambodia Tax, Tax Agent and MBA.

*** Please contact Phnom Penh HR now via 093 682 682 | 078 868 848 | info@pp-hr.com