Isn’t actual costing more accurate and therefore superior to absorbed costing?
DBA is an absorbed costing system in which all manufacturing costs – material, labor, subcontract services, and overhead – are absorbed rather than actual costs. Absorbed costs are approximate costs rather than actual costs.
Absorbed costing is highly efficient because it enables real time processing throughout the system workflow without introducing any delays for costing purposes.
Actual costing is the desire to apply actual costs to manufactured items with the idea that actual costs are inherently superior to approximate costs. In actual practice, however, actual costing is not practical, desirable, or achievable for these reasons:
•For many items, manufacturing overhead represents the largest cost element. There is no such thing as actual overhead costing. All overhead costing is an arbitrary allocation where general costs are applied to specific items using some type of formula. Our work center overhead rates, derived from an overall calculated shop rate, is superior to any method we know of.
•Attempting to apply actual labor costs, meaning worker wages and benefits, to specific jobs is impractical and not desirable. It would require collecting and entering actual labor hours on every single process, no matter how trivial, and accounting for overtime and downtime and synchronizing job hours with payroll hours. Jobs would be rewarded or penalized depending on which workers happened to be assigned. Instead, our work center labor rates, which are derived from a calculated shop rate, translate all this complexity into approximate hourly rates that provide a more consistent and useful labor costing basis.
•Attempting to have exact material costs would require waiting for supplier invoices to verify actual costs. Instead, we use PO costs so that received items are immediately available to jobs and sales orders. Minor cost variances between the receipt cost and supplier invoice cost get posted to Inventory Adjustments and have minor impact on overall item costs.
Actual costing is most commonplace in light manufacturing systems that do not offer absorbed costing. It is tedious and time-consuming and yields information of little practical value.
Absorbed costing, where you use calculated shop rates for labor and overhead and apply realistic costs to purchase orders, is far easier and much more efficient.
