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October 8, 2007

What is absorption costing?

Absorption costing means that all of the manufacturing costs are absorbed by the units produced. In other words, the cost of a finished unit in inventory will include direct materials, direct labor, and both variable and fixed manufacturing overhead. As a result, absorption costing is also referred to as full costing or the full absorption method.

Absorption costing is often contrasted with variable costing or direct costing. Under variable or direct costing, the fixed manufacturing overhead costs are not allocated or assigned to (not absorbed by) the products manufactured. Variable costing is often useful for management’s decision-making. However, absorption costing is required for external financial reporting and for income tax reporting.

Learn more about Manufacturing Overhead.

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Comments

23 Responses to “What is absorption costing?”

  1. AA NACHII on April 1st, 2008 7:43 am

    Your site is fantastic with complicated and
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    Iam an accountant still persuing courses in the field and found your site very,very useful.pose more harder questions and solve them for us, because we lack study materials
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  2. ngabaneni on July 9th, 2008 10:00 am

    thanks for your response. i will call again

  3. ash khan on September 6th, 2008 6:45 am

    i did find ur definitions very clear and easy to understand. it would have been even better if it could provide the practice questions of different topics.

  4. Endah on September 7th, 2008 9:21 pm

    I wonder what is the impact of standard costing to reliable control. Is it right, the company with standard costing more controlable than the one who adopt actual costing? What should be our concern, if the company adopt standard costing, particularly from control pint of view?
    Many thanks…

  5. Rajesh kumar on October 14th, 2008 12:49 pm

    great material but can you mail me all the pages related to managerial accounting..?

  6. Seyed on November 24th, 2008 5:04 am

    we can easily understand the topics by the way of explanation in simple english.Can u E-mail the materials relevant to absorption costing?

  7. Carlos on December 8th, 2008 12:09 am

    Could you please e-mail me about the double declining method of depreciation?

    I always look forward to receive messages from you. It was a big help for us accountants and accountancy students all the information we receive. Thank you very much.

  8. jennifer on December 9th, 2008 3:47 am

    hello. i am very happy with this site. it is indeed very generous of you to share your knowledge to us online. i am still saving in order for me to buy your books. i am very glad of the contributions you give me since i am an accounting student right now.

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  9. TDT on January 14th, 2009 8:26 pm

    Hello

    I am having problems with warehouse costs whether to charge them to cost of raw materials or production overheads. there is an Inwards goods department specifically for receiveing materials and a warehouse for stroring the raw materials. What is the best way to treat the warehouse salaries.

  10. trotsky on January 26th, 2009 9:25 am

    When faced with certain fixed and variable cost decisions, in a production firm as a student under the study of managerial accounting, can u expanciate to me whether there are any guidelines of analysing cost situations before making any needed desicion. May be, when two experts of managerial accountants are made o study the trend of a cost behaviour, different interpretations may arise.

  11. Wei2 on February 19th, 2009 4:07 am

    Hi, would like to seek your opinions on this question. Why pre-determined absorption rates are better?

  12. spondias on March 16th, 2009 7:43 am

    Hi, would you to ellaborate on the defference between “over” and “under” absorption in absorption costing. How are they identirfied? Is it “over” when you produce above your expected activity level or “under” when you produce below the expected activity level? Thank you!

  13. jo on March 19th, 2009 9:23 am

    hi can someone explain how to calculate the apportionment of overheads to me?

    thank you!

    I find this website very helpful.

  14. Humail on April 24th, 2009 9:03 am

    can some one please send an Example of Obserption Costing ? where the Variable Selling and variable Production Cost will be Put on ?

  15. Johnston on May 4th, 2009 2:31 am

    can someone specialise on accounting clearly explained what is lease and give an example

  16. Tim on June 11th, 2009 2:40 pm

    where and how can absorption costing concept apply?

  17. timmy on June 16th, 2009 5:44 am

    i got coursework on absorption costing so can u explain it in a simpler form that i can understand

  18. Shams Al-Din on June 27th, 2009 10:40 pm

    thanks too much for your outstanding efforts to make accounting aeasy to grasp even for non native English speakers, realy I am benifiting too much from your site

  19. pankaj on August 15th, 2009 5:15 pm

    hello. i am very happy with this site

    realy I am benifiting too much from your site

  20. Ashraf on August 25th, 2009 8:37 am

    what is application of absorption costing?

  21. UAE Kabsorat on September 25th, 2009 6:42 am

    Thanks the website is really helpful and give enough information for my project..

    But i have question, could someone please explain the (Net fixed assets) !

    Thankx again ^^

  22. Rachel on October 5th, 2009 7:41 pm

    Thanks for this,
    but one question; what is the reason why absorption costing is used by companies??

  23. duth on October 28th, 2009 1:09 pm

    kindly explain how overhead is absorbed

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