absorption costing

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Related to absorption costing: marginal costing

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.

References in periodicals archive ?
A case study conducted by Frega, Lemos and Souza (2007) of a brick and ceramic company identified this gain, finding that the company had migrated from absorption costing to direct costing combined with ABC for the purpose of improving its competitiveness.
The assumption behind absorption costing is that these expenses are necessary for the product to be manufactured, so each should attach itself to, or be absorbed by, the product being manufactured.
These opportunities arise when production exceeds sales and occurs as a result of the differences between absorption costing and variable costing.
A) net income under absorption costing is higher than net income under variable costing.
The existing reporting system provided a traditional absorption costing income statement (Example 1) where overhead was applied to production based on material consumption.
Absorption costing takes its name from the manner in which inventory is valued for reporting on the balance sheet and the cost of goods sold is valued for reporting in the income statement--in other words, the manner in which products "absorb" cost as they are manufactured.
Absorption costing, used for all three product lines, was chosen primarily because of government contracts.
This task is absorption costing, of which ABC is simply an advanced form.
Robert, having consulted with the company's former CPA, was aware the business had always used absorption costing for external reporting purposes as required by U.
Mister Munchie's absorption costing income statements for 2006 and 2007 are presented in Exhibit 1.
Many accounting experts in the eighties and nineties argued that absorption costing, which had been developed at the turn of the 20th century, needed to be replaced by new costing systems that were more appropriate for modern business.