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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
  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
absorption costing

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

See also direct costing
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