Absorption Costing

is the method under which all manufacturing costs, both variable and fixed, are treated as product costs with non-manufacturing costs, e.g. selling and administrative expenses, being treated as period costs.

Absorption costing treats all manufacturing costs (variable and fixed) as product costs. Non-manufacturing costs (selling and admin) are treated as period costs.

- Used in product/service costing, budgeting, and variance analysis.
- Used to support pricing decisions and profitability analysis by cost behavior and drivers.

- Example: The costing team uses **Absorption Costing** to allocate costs and analyze margins by product line.

- Why it matters: Improves cost accuracy, supports better pricing and budgeting, and strengthens performance measurement.