Absorption Costing

Knowledge Center

Inventory valuation / costing including all manufacturing costs. Explanation of Absorption Costing.

The Absorption Costing method (also: Full Costing) is an inventory valuation and costing model that includes all manufacturing costs:

  • Direct materials. Those materials that become an integral part of a finished product, and which can be easily traced back into the finished product.
  • Direct labor. Those factory labor costs that can be easily traced back to individual units of product. Also known as touch labor.
  • Both variable and fixed manufacturing overhead.

in the cost of a unit of product. As a result, under absorption costing, fixed overhead is a product cost until the products are sold.

Absorption costing is also known as the full cost method.

Should Fixed Manufacturing Costs be Included in Inventories?

Advocates of Absorption Costing say that it should, because all of the production costs are needed to create the products. Thus, they have "future economic benefits."

Advocates of Variable Costing argue that for a fixed manufacturing-cost to be an asset, it has to meet a future cost avoidance criterion. Much in the same way as prepaid insurance. In the case of fixed manufacturing costs, they do not meet this criterion because they are incurred each time the production line opens. Thus, they should be regarded as expenses in that period, and only the variances in expenses should be inventoried.

Problems with absorption costing also include potential manipulations by plant managers, such as increasing production regardless of sales levels. In this way costs can be deferred to the next year, and a higher current profit can be shown for the sake of bonuses and promotions.

Consequences of using Absorption Costing for Profit calculation

The difference is important for calculating profit when the beginning inventory level and the ending inventory level are different:

  • If beginning & ending inventory levels are equal: absorption costing profit = variable costing profit;
  • If inventory levels are run down over the period: variable costing profit will be higher than absorption costing profit;
  • If inventory levels are increased over the period: absorption costing profit will be higher than variable costing profit.

Special Interest Group - Absorption Costing

Special Interest Group (1076 members)

Forum - Absorption Costing  

In this forum you will find recent interesting discussions.

  Absorption of Fixed Costs (1 reactions)
How does production affect the absorption of fixed costs?...
  Normal Production Levels Under FAS 151 (4 reactions)
FAS 151 says judgment needs to be used to determine inventor...
  Fixed Overhead in Full Costing (2 reactions)
What does "fixed overhead is a product cost until the produc...
  Absorption Costing Converts Fixed Production Overheads into Product Cost (4 reactions)
Absorption Costing is a tool which converts fixed production...
  Marketing Overheads in Absorption costing? (1 reactions)
Are marketing overheads also direct labour cost? Meaning: sh...
  Difference Absorption Costing versus Full Costing? (1 reactions)
Aren't Absorption costing and Full costing different?...
  Absorption Cost Frequency
How often (what frequency) should we calculate absorption co...
Hot Assessing Cost Absorption of Underperforming Business Units
Please share any absorption cost models you have to assist w...

Best Practices - Absorption Costing

Here you will find the most valuable discussions from the past.

Expert Tips - Absorption Costing

Here you will find high-quality advice from experts.


Weaknesses of Absorption Cost

Budgeting, Controlling...

Resources - Absorption Costing

Here you will find powerpoint presentations, micro-learning videos and further information sources.

Overhead Costs and Absorption Costing

Absorption Costing, Overhead, Indirect materials, Indirect labour, Indirect expenses, Allocation, Apportionment, Absorpt...

Absorption versus Marginal Costing

Accounting, Controlling, Budgeting...

Absorption versus Variable Costing

Accounting Controlling, Bugeting...

Hybrid Costing

Managerial accounting...

News about Absorption Costing


News about Inventory Valuation


Videos about Absorption Costing


Videos about Inventory Valuation


Presentations about Absorption Costing


Presentations about Inventory Valuation


Books about Absorption Costing


Books about Inventory Valuation


More about Absorption Costing


More about Inventory Valuation


Compare with: Variable Costing  |  Activity Based Costing

Return to Management Hub: Decision-making & Valuation  |  Finance & Investing  |  Supply Chain & Quality

More Management Methods, Models and Theory

Special Interest Group Leader

You here? Sign up for free


About 12manage | Advertising | Link to us / Cite us | Privacy | Suggestions | Terms of Service
© 2019 12manage - The Executive Fast Track. V15.2 - Last updated: 18-11-2019. All names ™ of their owners.