Absorption Costing

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DEFINITION of 'Absorption Costing'

A managerial accounting cost method of expensing all costs associated with manufacturing a particular product. Absorption costing uses the total direct costs and overhead costs associated with manufacturing a product as the cost base. Generally accepted accounting principles (GAAP) require absorption costing for external reporting.

Absorption costing is also known as "full absorption costing".

INVESTOPEDIA EXPLAINS 'Absorption Costing'

Some of the direct costs associated with manufacturing a product include wages for workers physically manufacturing a product, the raw materials used in producing a product, and all of the overhead costs, such as all utility costs, used in producing a good.

Absorption costing includes anything that is a direct cost in producing a good as the cost base. This is contrasted with variable costing, in which fixed manufacturing costs are not absorbed by the product. Advocates promote absorption costing because fixed manufacturing costs provide future benefits.

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RELATED FAQS
  1. Why are fixed manufacturing costs included in inventories through the absorption ...

    Fixed manufacturing costs are included in inventories through the absorption costing method because absorption costing accumulates ... Read Full Answer >>
  2. What are some of the advantages and disadvantages of absorption costing?

    Companies must choose between using absorption costing or variable costing in their accounting systems. There are advantages ... Read Full Answer >>
  3. How is overhead distributed through total absorption costing?

    Through total absorption costing, overhead is distributed into indirect costs incurred from the manufacturing and production ... Read Full Answer >>
  4. What are the differences between absorption costing and variable costing?

    Absorption costing includes all costs, including fixed costs, in figuring the cost of production, while variable costing ... Read Full Answer >>
  5. How is absorption costing treated under GAAP?

    Under generally accepted accounting principles (GAAP), absorption costing is required for external reporting. All normal ... Read Full Answer >>
  6. Why is overhead cost allocation sometimes manipulated on an income statement?

    Overhead cost is sometimes manipulated on an income statement to make the company appear to be performing better than it ... Read Full Answer >>
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