Absorption Costing

Definition

A costing method where products absorb all manufacturing costs—direct materials, direct labor, and fixed overhead. Think of it like a sponge: the product soaks up every factory cost, whether it varies with production or not.

Related Terms

Variable Costing

A costing method where only variable manufacturing costs are assigned to products. Fixed overhead is expensed immediately. Used for internal reporting, not GAAP-compliant.

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