Absorption costing, sometimes called “full costing,” is a managerial accounting method for capturing all costs associated with manufacturing a particular product. All direct and indirect costs, such as direct materials, direct labor, rent, and insurance, are accounted for when using this method.
- Absorption costing differs from variable costing because it allocates fixed overhead costs to each unit of a product produced in the period.
- Absorption costing allocates fixed overhead costs to a product whether or not it was sold in the period.
- This type of costing method means that more cost is included in the ending inventory, which is carried over into the next period as an asset on the balance sheet.
- Because more expenses are included in ending inventory, expenses on the income statement are lower when using absorption costing.
