absorption costing

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Absorption Costing

In accounting, the practice of recording as expenses all costs associated with producing a good. This includes both the costs of the raw materials and the fixed costs, such as employee wages, the cost of machinery, and so forth. External reporting must use absorption costing. It contrasts with variable costing, which does not consider fixed costs.
Absorption costingclick for a larger image
Fig. 2 Absorption costing. Table showing an example.

absorption costing

a system of product COSTING which assigns materials and labour, and OVERHEAD costs to units of product manufactured (as in STANDARD COSTS). Fixed overhead costs are assigned to products by means of an appropriate COST RATE which divides planned overhead costs by planned output. Fig. 2 shows an illustration of absorption costing.

With absorption costing, fixed overhead costs are included in the value of work in progress and finished goods stock. By contrast, with MARGINAL COSTING systems fixed overhead costs are charged as a single block against revenues in the period when they are incurred, and work in progress and finished goods stocks are valued at direct materials and labour cost only.

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