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Business Definition for: absorption costing
Dictionary of Accounting Terms
absorption costing

method in which all manufacturing costs, variable and fixed, are treated as product cost , while nonmanufacturing costs (e.g., selling and administrative expenses) are treated as period cost Absorption costing for inventory valuation is required for external reporting. See also variable costing .

A comparison between absorption and direct costing follows:

Absorption Costing Variable Costing
  1. Required for outside reporting
  2. Includes fixed overhead as an inventoriable cost
  3. Stresses gross profit
  4. Has a higher net income when production exceeds sales
  1. Not accepted for outside reporting
  2. Does not include fixed overhead as an inventoriable cost
  3. Stresses contribution margin
  4. Has a higher net income when sales exceed production
Dictionary of Business Terms
absorption costing

in cost accounting applying both fixed and variable costs to derive the cost of the unit produced.

See also direct costing
Related Terms:
direct costing

in cost accounting, method that includes only variable costs in the cost of goods sold. The direct costing method may be used for internal purposes only.

Referring Terms:
conventional costing
full costing
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