Absorption costing, also known as full costing, is a method of accounting that involves allocating both fixed and variable manufacturing costs to products. It includes direct materials, direct labor, and overhead costs in the total cost of each unit produced. Fixed overhead costs are absorbed into the inventory valuation and expensed when the products are sold. Absorption costing is commonly used for financial reporting purposes as it aligns with generally accepted accounting principles (GAAP). It provides a comprehensive view of product costs but can be influenced by changes in production volumes and may not accurately reflect the cost of individual products or services.
