A principle whereby fixed as well as variable costs are allotted to cost units and total overheads are absorbed according to activity level. The term may be applied where production costs only or costs of all functions are so allotted.
An accounting practice whereby fixed and variable costs are allocated and apportioned to cost units and total overheads are absorbed according to activity level. The term may be applied where production costs only, or costs of all functions are so allocated.
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 â€œabsorption basisâ€ 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.
Costing system wherein fixed manufacturing overhead is allocated to (or absorbed by) products being manufactured. This system, which treats fixed manufacturing costs as a product cost, is required for external financial statements. To Top
An approach to inventory valuation in which variable costs and a portion of fixed costs are assigned to each unit of production. The fixed costs are usually allocated to units of output on the basis of direct labor hours, machine hours, or material costs. Syn: allocation costing. See: activity-based costing.