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. Overhead Rate

    Overhead rate is a cost added on to the direct costs of production ...
  2. Variable Overhead

    Variable overhead is the indirect cost of operating a business, ...
  3. Variable Overhead Spending Variance

    Variable overhead spending variance is the difference between ...
  4. Production Volume Variance

    The production volume variance measures the total amount of overhead ...
  5. Activity-Based Costing (ABC)

    Activity-based costing is a system that tallies the costs of ...
  6. Variable Overhead Efficiency Variance

    Variable overhead efficiency variance is the difference between ...
Related Articles
  1. Investing

    Where Netflix Could Go From Here

    The fact that prices are above resistance tells us that we want to be in the direction of the buyers.
  2. Investing

    Understanding Marginal Cost of Production

    Marginal cost of production is an economics term that refers to the change in production costs resulting from producing one more unit.
  3. 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.
  4. Investing

    How mergers and acquisitions can affect a company

    M&A can have a profound effect on a company’s growth prospects and outlook, but with a significant degree of risk.
  5. 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.
  6. Personal Finance

    9 Weird Companies That Hit The Big Time

    From shipwreck explorers to bowling lanes, just about any company can be publicly traded.
  7. Insurance

    Disability Insurance For Business Owners

    If you become injured and no longer able to work, would your business survive?
  8. Investing

    Analyzing Operating Margins

    Learn how to analyze operating margins and how to put this aspect of equity analysis to work.
  9. Investing

    Opinion: Time to Be Long Bitcoin

    A technical trader explains his strategy around Bitcoin.
RELATED FAQS
  1. What are some examples of overhead treatment in cost accounting?

    Look at a brief example of how cost accounting treats overhead expenses, how those expenses are different from direct labor, ... Read Answer >>
  2. Does gross profit include labor and overhead?

    Gross profit is a company's profit after subtracting the costs of producing the goods and services. Several costs impact ... Read Answer >>
  3. What is the difference between prime cost and conversion cost?

    Understand the difference between prime costs and conversion costs, and learn how each type is used in analyzing business ... Read Answer >>
  4. What are the types of costs in cost accounting?

    Cost accounting aids in decision-making by helping a company's management evaluate its costs. There are various types of ... Read Answer >>
  5. How are fixed costs treated in cost accounting?

    Learn how fixed costs and variable costs are used in cost accounting to help a company's management with budgeting and controlling ... Read Answer >>
  6. What is the prime cost formula?

    Prime costs are the costs directly attributed to the production of a product. Before calculating prime costs, direct costs ... Read Answer >>
Trading Center