Business Definition for: absorption costing
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 |
- Required for outside reporting
- Includes fixed overhead as an inventoriable cost
- Stresses gross profit
- Has a higher net income when production exceeds sales
|
- Not accepted for outside reporting
- Does not include fixed overhead as an inventoriable cost
- Stresses contribution margin
- Has a higher net income when sales exceed production
|
absorption costing
Related Terms:
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:
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