Absorption costing is an accounting method primarily used in manufacturing. In absorption costing, the cost of a manufactured product includes the direct costs plus an apportioned share of the indirect overhead costs associated with manufacturing the good. The indirect overhead costs are apportioned into the cost by assigning a per unit amount of manufacturing overhead to each unit of production.The costs that make up the total manufactured cost of a good include the production labor, raw materials and utility costs to run the manufacturing facility. These costs vary as production varies. The indirect costs include rent and insurance on the manufacturing facility. These costs have to be paid regardless of production levels. ABC Corp produces sponges. The cost of labor to manufacture one sponge is $.50. The cost of the raw materials is $.25 per sponge. ABC’s monthly rent payment for its sponge factory is $30,000 and monthly insurance on the sponge factory is $4,000. Assume ABC made 100,000 sponges in the month. The total cost per sponge is as follows: Labor .50 Raw Materials .25 Rent ($30,000/100,000) .30 Insurance ($4,000/100,000) .04 Total absorption cost 1.09 If ABC produced 200,000 units in the month, rent cost per unit drops to $.15 ($30,000/200,000 sponges). Absorption costing is the required cost accounting method for external reporting under generally accepted accounting principles, as well as U. S. federal income tax returns.