Absorption Costing
Absorption costing is a method of inventory costing in which all variable manufacturing
costs and all fixed manufacturing costs are included as inventoriable costs. That is,
inventory “absorbs” all manufacturing costs. The job costing system you studied in
Chapter 4 is an example of absorption costing.
Under both variable costing and absorption costing, all variable manufacturing costs
are inventoriable costs and all nonmanufacturing costs in the value chain (such as
research and development and marketing), whether variable or fixed, are period costs and
are recorded as expenses when incurred.