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