What is Absorption Costing?

Inventory valuation / costing including all manufacturing costs. Explanation of Absorption Costing.

The Absorption Costing method (also: Full Costing) is an inventory valuation and costing model that includes all manufacturing costs:

• Direct materials. Those materials that become an integral part of a finished product, and which can be easily traced back into the finished product.
• Direct labor. Those factory labor costs that can be easily traced back to individual units of product. Also known as touch labor.
• Both variable and fixed manufacturing overhead.

in the cost of a unit of product. As a result, under absorption costing, fixed overhead is a product cost until the products are sold.

Absorption costing is also known as the full cost method.

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