Use of Absorption Costing System in Setting a Selling Price (Sales Revenue):
One of the most important decision faced by an organization is the setting a Selling price for goods/services, which it produce. Selling price is the major determinant of the quantity demanded. Cost is a major factor in the pricing decision because for commercial organizations, profit will only be earned if revenue exceeds cost. But selling price must be sufficient to cover all costs for running the business.
Explanation with Solved Example:
Absorption costing system covers the following items:
Following costs were incurred during the year ended 30 June 2016 for the production of 1000 units.
Calculate total sales revenue if all production was sold at a profit of 25% of total costs and business employs absorption costing system.
Calculation of total sales revenue