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.
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.
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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About the Author
Chartered accountant Michael Brown is the founder and CEO of Double Entry Bookkeeping. He has worked as an accountant and consultant for more than 25 years in all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a BSc from Loughborough University.