DEFINITION of 'Absorbed'

Absorbed as a business term generally refers to taking in, acquiring or bearing. The term can be applied in a number of situations, the most common of which is manufacturing overhead. Absorbing a cost increase instead of passing it on to a consumer is another instance in which the term is used. Others include absorbing shares in an initial public offering (IPO) and absorbing a firm in a mergers and acquisition transaction (M&A).

BREAKING DOWN 'Absorbed'

Absorbed overhead is manufacturing overhead that has been allocated to produced goods or other cost objects. Cost objects are specific items for which a company wants to quantify costs for managerial accounting purposes. A service, segment, project, activity and corporate department are all examples of a cost object. Overhead represents indirect costs (i.e., not direct labor or materials) that are assigned to a product or cost object using an overhead rate. When this overhead is allocated, it becomes absorbed. There are times when overhead is either overabsorbed or underabsorbed, meaning that the allocated amount is higher or lower than the actual amount incurred. A firm will eventually correct the imbalance to produce more accurate cost accounting records.

An absorbed price increase of a cost input refers to a company bearing the additional cost instead of passing it on to its customers. This would cut into the company's profit margin, but it is a conscious decision by management to maintain customer satisfaction with respect to price, especially if the product or service in question is subject to a measure of demand elasticity or if there are many competitors in the market. The company would rather keep the sale at a lower margin rather than lose it altogether. For example, let's say a peanut butter company's cost for peanuts increases from 50 cents per jar to $1.00 per jar. The company keeps the cost of one jar at $3 instead of raising it to $3.50, thus absorbing the increase in peanut price input. However, its profit margin declines.

When an underwriter is unable to sell all the shares of a bought deal in an IPO, it must take in the remaining shares on its own books. The unsold shares are said to be absorbed by the underwriter. A company that has been purchased in an M&A transaction will be absorbed when either the deal officially closes or when its integration with the acquirer is complete.

RELATED TERMS
  1. Standby Underwriting

    Standby underwriting is an IPO sales agreement in which the underwriter ...
  2. Underwriting Agreement

    An underwriting agreement is a contract between a group of investment ...
  3. Lead Underwriter

    A lead underwriter is usually an investment bank that organizes ...
  4. Underwriting Spread

    An underwriting spread is the difference between what underwriters ...
  5. Underwriting Income

    Underwriting income is profit generated by an insurer's underwriting ...
  6. Negotiated Underwriting

    A process in which both the purchase price and the offering price ...
Related Articles
  1. Insurance

    Is Insurance Underwriting Right For You?

    If you have excellent analytical skills and an eye for detail, this may be your calling.
  2. Insurance

    What Prequalification and Underwriting Do

    Learn now prequalification and underwriting can help you buy the policy that best meets your needs.
  3. Trading

    Greenshoe Options: An IPO's Best Friend

    Find out how companies can save or boost their public offering price with these options.
  4. Investing

    What's the Difference Between an IPO and a Direct Listing?g?

    These are the key differences between an initial public offering and a direct listing of shares
  5. Personal Finance

    The Cookie Jar Method of Budgeting

    The cookie jar method of budgeting can get you on the path to saving and reaching financial goals.
  6. Managing Wealth

    Top 6 Performing IPOs of 2015 (ONCE, GBT)

    2015 has produced a mixed year for initial public offerings, with small biotechs overcrowding the winner’s list.
  7. Small Business

    How Effective Is The Chinese Wall?

    Because underwriters work on one side of the Chinese wall and analysts work on the other side, information gathered by the underwriters is not supposed to be shared with analysts.
  8. Investing

    What Investors Can Learn From M&A Payment Methods

    How a company pays in a merger or acquisition can reveal a lot about the buyer and seller.
  9. Small Business

    Uncovering The Securities Firm

    Learn about the various departments of a securities firm and the professionals who make it work.
RELATED FAQS
  1. Do underwriters make guarantees to sell an entire IPO issue?

    Underwriters represent the group of representatives from an investment bank whose main responsibility is to complete the ... Read Answer >>
  2. What does the underwriter do in a new stock offering?

    Learn the role an underwriter plays for an initial public offering, and the steps an underwriter takes in preparing for an ... Read Answer >>
  3. What is real estate underwriting?

    See how underwriters for major lenders scrutinize real estate loans and manage their risk, and learn the origin of the term ... Read Answer >>
  4. What is the difference between underwriting and investment income for an insurance ...

    Learn more about insurance companies' investment and underwriting incomes. Read about how investment incomes and underwriting ... Read Answer >>
Hot Definitions
  1. Cryptocurrency

    A digital or virtual currency that uses cryptography for security. A cryptocurrency is difficult to counterfeit because of ...
  2. Financial Industry Regulatory Authority - FINRA

    A regulatory body created after the merger of the National Association of Securities Dealers and the New York Stock Exchange's ...
  3. Initial Public Offering - IPO

    The first sale of stock by a private company to the public. IPOs are often issued by companies seeking the capital to expand ...
  4. Cost of Goods Sold - COGS

    Cost of goods sold (COGS) is the direct costs attributable to the production of the goods sold in a company.
  5. Profit and Loss Statement (P&L)

    A financial statement that summarizes the revenues, costs and expenses incurred during a specified period of time, usually ...
  6. Monte Carlo Simulation

    Monte Carlo simulations are used to model the probability of different outcomes in a process that cannot easily be predicted ...
Trading Center