Absorption Costing

In DBA job labor transactions absorb labor and manufacturing overhead costs into item inventory values and cost of goods sold for complete and efficient costing.

What is absorption costing?

Absorption costing is the means by which actual labor and manufacturing overhead costs, which are incurred through payroll and monthly expenses, are translated into hourly rates that are applied to job labor transactions for inclusion in total job cost.

Items are received to inventory at estimated or actual job cost to absorb labor and overhead costs into item inventory values, which ultimately flow through to cost of goods sold when items are invoiced.

Absorption costing is efficient

Absorption costing is efficient because it occurs automatically with job labor transactions and requires no manual intervention or period end adjustments.

Each item you manufacture has a complete cost profile that includes material, labor, subcontract service, and manufacturing overhead costs.

Complete cost profiles enable you to compare margin contributions among products and help you make sound pricing decisions.

Shop rates establish work center hourly rates

A unique DBA innovation is our Shop Rates screen, which divides actual labor and manufacturing overhead costs by reported job labor hours for a recent time period to establish an hourly shop rate for labor and an hourly shop rate for overhead.

Hourly shop rates are applied to work center hourly rates, where they can be factored up or down for exceptions. Work center hourly rates are used by cost rollups to calculate estimated manufacturing costs and are applied to job labor transactions.

WIP tracking is automatic

Another costing efficiency benefit is that DBA tracks the value of work in process automatically without any need for period end adjustments. Costs flow into WIP when materials are issued to jobs, job labor is updated, and subcontract service POs are received.

Costs flow out of WIP when finished items are received to inventory. When a job gets closed, any variance between input and output costs gets posted to a WIP variance account so that the WIP account is always in perfect balance.

Take your efficiency to a new level

Complete cost profiles with absorbed labor and overhead costs are essential for sound decision making and efficient manufacturing.

If you’ve hit the efficiency wall with your existing costing and manufacturing methods, replace them with absorption costing and Demand Driven MRP. Take your company to a new level of efficiency for the Amazon age.

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