Absorption costing

This refers to a management costing method used to reflect the full cost of producing goods or services.

The absorbed cost of a good or service includes an appropriate proportion of the indirect costs of the item; for example a share of the business’s insurance premiums, management overheads or other fixed costs. Understanding the full cost of the item is important for internal decisions on pricing.  Absorption costing is used for external reporting purposes.

Absorption costing is a term normally found in management accounting and financial reporting.

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