Definition Absorption costing, also known as full costing refers to a system in which all the fixed manufacturing overheads are allocated to products. The alternative system which assigns only variable manufacturing costs to products then fixed costs added separately is termed marginal costing. Variable costing vs. Absorption costing Before discussing the arguments for absorption costing, an illustration of both methods would provide a better comparative insight of major differences using the examples below:- The …showed first 75 words of 1093 total…

…showed last 75 words of 1093 total…expense only in the period in which the goods are sold. Losses are therefore unlikely to be reported in the periods when stocks are being built up. In these circumstances, absorption costing appears to provide a more logical profit calculation hence avoids fictitious losses being reported. References 1. Financial Analysis 2nd Edition, Bill Rees, Prentice Hall Europe 1995. 2. Business Accounting 2, Frank Wood, Pitman Publishing 1989. 3. Management & Cost Accounting 3rd edition, Colin Drury, ELBS with Chapman & Hall 1993.