Absorption costing treats all manufacturing costs as product costs, regardless of weather they are variable or fixed.
According to
E.L. Kohler,” Absorption costing is a process of allocating all or a portion of fixed and variable production costs to work in progress/ process, cost of sales and inventory.”
Garrison and Nureen, ” Absorption costing is a costing method that includes all manufacturing costs- direct material, direct labour and both variable and fixed manufacturing overheads – in in the cost of a unit of product .”
From the above discussion, we can conclude that Absorption costing is a method of product costing that aims to include in the total cost of a product an appropriate share of an organization’s total overhead, which is generally taken to mean an amount that reflects the amount of time and effort that has gone into producing the product.
Component of Absorption costing:
- Direct material (DM)
- Direct labour (DL)
- Variable manufacturing overhead (VMOH)
- Fixed manufacturing overhead (FMOH)
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