Absorption Costing

In accounting, absorption costing is the allocation of all manufacturing costs to products. This includes both direct costs, such as materials and labour, and indirect costs, such as overhead. The purpose of absorption costing is to provide a more accurate cost picture of each product manufactured.

Under this method, all manufacturing costs are assigned to the products manufactured. This provides a complete view of the total cost of each product. However, it can also lead to higher costs being assigned to slow-selling or unprofitable products.