Absorption Costing

Absorption costing is a method of tracing both fixed and variable costs of production to a product.

In contrast, the alternative is referred to as variable costing, which only traces variable costs of production to the product, and treats the fixed costs as period expenses.

Types of Absorption Costing

There are a number of forms of absorption costing each used for a specific type of manufacturing.

Job Costing

In job costing costs are allocated to a job. For example, a batch of twenty calculators costs 200 to produce, the unit cost is 200 / 20 = 10

Activity Based Costing

In activity based costing (ABC) costs are allocated by activity. For example, a product requires two procurement requests (cost each 10) and three materials handling requests (cost each 5). The costs allocated to the product would be 10 x 2 + 5 x 3 = 35.

Process Costing

In process costing costs are allocated by process. For example, a product needs to be mixed (process cost 30 per gallon), and bottled (process cost 20 per gallon). The cost allocated to the product is 20 + 30 = 50 per gallon.

Additional information can be found in our costing tutorials.

For further information see the Wikipedia definition.

Learn a new bookkeeping term

Random bookkeeping terms for you to discover.

Link to this page

Click in the box to copy and paste the absorption costing definition link to your site.

Return to the Glossary

Absorption Costing July 20th, 2015Team

You May Also Like


Related pages


present value ordinary annuity calculatorlease accounting journal entriesbills receivable meansunearned fees journal entryadjusting entries affect the cash accountannuity due payments are made8 steps of accounting cycleaged receivables reportstandard inventory costingdoes accumulated depreciation go on the balance sheethow to calculate variable cost per unitpayroll accrual journal entryaccounting ratio calculatorfob on invoicedeferred liability journal entryaccounting entry for prepaid insuranceadjusting entry for notes payablefinance lease journal entries lessorclosing entries retained earningsmargin and markup formulasexcel internal rate of returnhow to calculate labor rate variancecommon stock valuation calculatoraccounts receivable flowchart examplegp formula calculationroe return on equity formulacoupon bond formulaamortisation of intangiblesaccounting special journalsaccrual journal entry examplehow to calculate activity based costingaccounts receivable template excelprepare the adjusting entries for the month of juneacrued expenseperiodic inventory system definitionpayroll quizdeferred taxes definitionexcel formula for discount percentagedifference between account payable and notes payablecost variance exampleaccrual accounting entryentry for bad debt expensevariable contribution margindouble entry bookkeeping principlessingle step income statement templatetreatment of under and over absorption of overheadspractice bookkeeping testhow to calculate percent markupdouble entry bookkeeping questions and answersprepaid accounting entrycompute degree of operating leverageaccrual accounting entrieslifo effectjournal entry for doubtful debtsvertical common size analysissample payment voucher formatpmt examplewhat is inventory turnover ratio formulaaccounts receivable statement templatehow to calculate income tax payable on balance sheethow to calculate direct material price varianceusance letter of credit meaningreserve for bad debts journal entryfinancial accounting journal entries examplesrule of 78 loan calculatorannuity formula with growthsales chart excel templategeneral ledger accounts examplespresent value of annuity examplestationery supplies definitionpay dividends journal entryhow to prepare multi step income statementroe dupont formula