Free Guide to
Bookkeeping Concepts

Accounting Bookkeeping Concepts PDF Cover

Receive our free 18-page Guide to Bookkeeping Concepts (PDF) when you subscribe to our free newsletter.

You are already subscribed. This offer is not available to existing subscribers.
Step 2: Please check your email and click the confirmation link.


What is absorption costing?

Definition of Absorption Costing
Absorption costing (or full absorption costing) indicates that all of the manufacturing costs have been assigned to (or absorbed by) the units produced. In other words, the cost of a finished product will include the costs of:

  • direct materials
  • direct labor
  • variable manufacturing overhead
  • fixed manufacturing overhead

Absorption costing is required for external financial reporting and for income tax reporting.

Another method of costing (known a direct costing or variable costing) does not assign the fixed manufacturing overhead costs to products.