Absorption Costing

Absorption costing is a method of tracing both fixed and variable costs of production to a product.

In contrast, the alternative is referred to as variable costing, which only traces variable costs of production to the product, and treats the fixed costs as period expenses.

Types of Absorption Costing

There are a number of forms of absorption costing each used for a specific type of manufacturing.

Job Costing

In job costing costs are allocated to a job. For example, a batch of twenty calculators costs 200 to produce, the unit cost is 200 / 20 = 10

Activity Based Costing

In activity based costing (ABC) costs are allocated by activity. For example, a product requires two procurement requests (cost each 10) and three materials handling requests (cost each 5). The costs allocated to the product would be 10 x 2 + 5 x 3 = 35.

Process Costing

In process costing costs are allocated by process. For example, a product needs to be mixed (process cost 30 per gallon), and bottled (process cost 20 per gallon). The cost allocated to the product is 20 + 30 = 50 per gallon.

Additional information can be found in our costing tutorials.

For further information see the Wikipedia absorption costing definition.

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