Absorption Costing is an accounting method in managerial

accounting that captures all the costs that are associated with
the manufacturing of a specific product. All the indirect and
direct costs including direct labor, direct material, insurance,
rent et cetera are accounted for in this method.
As per the annual reports of the company, the major direct
costs incurred by the company are:
 Direct labor cost: this includes the expenses (such as
salaries) of the engineers who are involved in designing
and manufacturing the company’s products.
 Direct material costs: these are the cost incurred on all the
materials that have been used in the building process
Indirect costs include manufacturing overhead such as:
 Vehicles expenses (used to transport these engineers from
one site to the other)
 Fuel expenses can be allocated by looking at the mileage
being used at the site and in other office related activities
 Rent expense of the building that has been rented out by
the company
 Electricity expense can be allocated by looking at the
amount of electricity being used in the management
building and in the factory building
 Insurance expenses are incurred and allocated separately
for each expense such as insurance of vehicles, insurance
of the building being used as factory
  Administration expense of the building being used as office
Another model that can be used in this scenario is the activity-
based costing model.
We can use this model in the following way.
 Machine expenses are divided using machine hours as the
base
 Labor expenses are divided using labor hours as the base
 Setup expenses are divided using number of setups as the
base
The best method that can be used in this company is activity-
based costing model.