Absorption Costing

Absorption costing is a method of product costing that includes fixed manufacturing overhead costs, along with direct material, direct labor, and variable manufacturing costs, in the cost of the product. This method is also referred to as "full costing." Absorption costing is GAAP for financial statement purposes. Absorption costing is frequently contrasted with variable costing. The difference between absorption costing and variable costing methods is the treatment of fixed manufacturing overhead. Absorption costing includes fixed overhead as product costs, while variable costing treats all fixed costs as period costs. Fixed selling, general, and administrative costs are treated the same (as period costs) under both methods. See also variable costing and activity-based costing.