What is absorption costing also known as?

Absorption costing, also known as full costing, is a method of costing that captures all manufacturing costs—both fixed and variable—associated with the production of a product. This includes direct materials, direct labor, and both variable and fixed manufacturing overhead costs. The key feature of absorption costing is that it assigns all manufacturing costs to the product, which is reflected in the inventory value on the balance sheet and the cost of goods sold on the income statement.

This method is required by generally accepted accounting principles (GAAP) for external financial reporting and provides a comprehensive view of product costs, which can aid in pricing and profitability analysis. By allocating all costs related to production, absorption costing allows businesses to evaluate overall profitability and make informed decisions regarding resource allocation, inventory management, and pricing strategies.

In contrast, other costing methods such as marginal costing, direct costing, and standard costing focus on specific aspects of production costs or utilize different allocation techniques that may not account for all costs incurred.