Absorption Costing

Absorption costing means that all of the manufacturing costs are absorbed by the total units produced. In short, the cost of a finished unit in inventory will include direct materials, direct labour, 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 to 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. It is also referred to as the full- cost technique