Absorption Costing

Absorption costing is an accounting method that allocates all manufacturing costs—both fixed and variable—to the products produced. This means that the cost of goods sold includes direct materials, direct labor, and both variable and fixed manufacturing overhead. It contrasts with variable costing, where only variable costs are included. Absorption costing provides a comprehensive view of product costs and is often required for external financial reporting, as it can impact profitability calculations and inventory valuation. By absorbing all costs, it helps businesses understand the true cost of producing each item.