Absorption Costing

In Cost Accounting applying both fixed and variable costs to derive the cost of the unit produced. See also Direct Costing.

Method in which all manufacturing costs, variable and fixed, are treated asProduct Costs while nonmanufacturing costs (e.g., selling and administrative expenses) are treated as Period Costs. Absorption costing for inventory valuation is required for external reporting. See also Variable Costing.

A comparison between absorption and direct costing follows: