Absorption costing

Absorption costing is a method of identifying and ascertaining the cost of products or services. This is done by including both fixed and variable costs. The absorption method of costing can be contrasted with variable or marginal costing methods where costs of products or services are calculated using variable costs only. The absorption costing method requires the choice of an “absorption basis” by which fixed costs can be allocated appropriately. For example, the fixed costs of factory equipment repairs and maintenance may be allocated to the cost of producing specific products on the basis of their use of machine time. In another example, the cost of factory rent and rates may be allocated to products based on the amount of factory space that their production takes up.


reference: Business Studies / Accounting. Accounts & Finance Glossary. Jim Riley BA(Hons) MBA FCA // tutor2u