Absorption Costing

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What is 'Absorption Costing'

Absorption costing is 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".

BREAKING DOWN '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. What are some of the advantages and disadvantages of absorption costing?

    Examine the absorption costing method for accounting purposes, and learn about the advantages and disadvantages associated ... Read Answer >>
  2. How is absorption costing treated under GAAP?

    Read about the required use of the absorption costing method for all external reports under generally accepted accounting ... Read Answer >>
  3. What are the differences between absorption costing and variable costing?

    Examine the main differences between absorption costing and variable costing, along with the advantages and disadvantages ... Read Answer >>
  4. Why are fixed manufacturing costs included in inventories through the absorption ...

    Learn about the absorption costing method. Understand why fixed manufacturing costs are included in inventories through the ... Read Answer >>
  5. How is overhead distributed through total absorption costing?

    Learn how overhead is distributed through total absorption costing, and the steps required for a company to determine its ... Read Answer >>
  6. How are fixed costs treated in cost accounting?

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