Absorption costing method

I. Introduction
Absorption costing is a managerial accounting technique used to assign all production costs to the products or
services being produced. This method considers both direct and indirect costs associated with manufacturing a
product or delivering a service, including direct material costs, direct labor costs, and manufacturing overhead
costs. The absorption costing method is used for internal decision making, including pricing, production planning,
and cost control. It is also used for external financial reporting purposes to determine the cost of goods sold and
the value of inventory.

The purpose of absorption costing is to provide a more accurate reflection of the true cost of production,
including all of the indirect costs that are necessary to produce a product or service. This method of costing helps
managers understand the total cost of production and how it is allocated among different products or services.
However, absorption costing also has its limitations and disadvantages, which should be taken into account
when using this method of costing.

In this guide, we will discuss the basics of absorption costing, including its definition, purpose, and advantages
and disadvantages. We will also explore how absorption costing is calculated and how it is applied in decision
making and financial reporting. Finally, we will review the limitations and criticisms of absorption costing and its
future trends.
A. Definition of Absorption Costing
Absorption costing is a managerial accounting method that assigns all direct and indirect costs associated with
the production of a product or service to the units produced. This method is also known as full costing or
traditional costing.

In absorption costing, all manufacturing costs, including direct material costs, direct labor costs, and
manufacturing overhead costs, are allocated to the product or service. This includes fixed overhead costs such
as rent, depreciation, and utilities, which are allocated to the product or service based on a predetermined
allocation rate.

The purpose of absorption costing is to provide a comprehensive view of the cost of production by including all
costs associated with producing a product or service. This method is used for both internal decision making and
external financial reporting. The absorption costing method is required for external financial reporting purposes
under Generally Accepted Accounting Principles (GAAP) in the United States.

Absorption costing is often contrasted with variable costing, which only considers variable costs associated with
the production of a product or service. Variable costing does not allocate fixed overhead costs to the product or
service and is often used for internal decision-making purposes.
Importance
Absorption costing is an essential tool for cost accounting and financial reporting, as it provides a comprehensive
view of the true cost of producing a product. By allocating both direct and indirect costs to the final product,
companies can accurately calculate the unit cost of production and use this information to make informed
decisions about pricing, production volumes, and profitability.
Historical Development
Absorption costing has been used in manufacturing industries for over a century. It emerged in the early 1900s
as a way for companies to determine the full cost of production, including indirect costs. Over time, it has evolved
and become a standard practice in the accounting industry, used to calculate the cost of goods sold and
inventory values for financial reporting purposes.

B. Purpose of Absorption Costing

The primary purpose of absorption costing is to provide a more accurate picture of the cost of producing a
product or service. Absorption costing takes into account all costs associated with production, including direct
costs (such as direct materials and direct labor) and indirect costs (such as overhead costs). This method is used
to determine the total cost of production, the cost of goods sold, and the value of inventory.

Absorption costing is useful for internal decision making, such as pricing, production planning, and cost control.
By understanding the true cost of production, managers can make informed decisions about how to allocate
resources and manage costs. For example, managers can use absorption costing to determine the minimum
price at which a product can be sold to cover its total cost of production.

Absorption costing is also used for external financial reporting purposes, such as preparing financial statements.
Under Generally Accepted Accounting Principles (GAAP) in the United States, companies are required to use
absorption costing to prepare their financial statements. This method of costing provides a more comprehensive
view of the cost of production and helps investors and other stakeholders make informed decisions about the
company's financial health.

Overall, the purpose of absorption costing is to provide a more accurate and complete view of the cost of
production, which is important for both internal decision making and external financial reporting.
C. Advantages and Disadvantages of Absorption Costing

Absorption costing has several advantages and disadvantages that should be considered when choosing a
costing method.

Advantages of Absorption Costing:

Comprehensive Costing: Absorption costing provides a comprehensive view of the total cost of production,
including all direct and indirect costs associated with manufacturing a product or delivering a service. This
method helps managers understand the true cost of production and make informed decisions about pricing,
production planning, and cost control.
GAAP Compliance: Absorption costing is required for external financial reporting under Generally Accepted
Accounting Principles (GAAP) in the United States. This method of costing provides a standardized approach to
determining the cost of goods sold and the value of inventory.

Product Cost Stability: Absorption costing provides a stable product cost over time because it takes into account
all costs associated with production, including fixed costs. This stability can be helpful for planning and budgeting
purposes.

Disadvantages of Absorption Costing:

Overhead Allocation: Absorption costing requires the allocation of overhead costs to products or services based
on predetermined allocation rates. This can be subjective and may not accurately reflect the actual usage of
overhead costs by individual products or services.

Inventory Valuation: Absorption costing values inventory at the total cost of production, including fixed overhead
costs. This can lead to distortions in inventory valuation, particularly when production levels fluctuate.

Cost-Volume-Profit Relationships: Absorption costing assumes that fixed costs are directly related to production
volume. This can result in inaccurate cost-volume-profit relationships, particularly in industries where fixed costs
are not directly related to production volume.

Overall, absorption costing provides a comprehensive view of the total cost of production, but it has some
limitations and disadvantages that should be considered when using this method of costing.
II. Overview of Absorption Costing
Absorption costing is a method of costing used in managerial accounting that assigns all direct and indirect costs
associated with producing a product or service to the units produced. This method is used to determine the total
cost of production, the cost of goods sold, and the value of inventory.

- Components of Absorption Costing

The components of absorption costing include:
Direct Materials: The cost of materials that are directly used in the production of a product.
Direct Labor: The cost of labor that is directly involved in the production of a product.
Manufacturing Overhead: The indirect costs associated with producing a product, such as rent, utilities,
depreciation, and other overhead costs.

- Calculation of Absorption Costing

The calculation of absorption costing involves adding together the direct materials, direct labor, and
manufacturing overhead costs to determine the total cost of production. This total cost is then divided by the
number of units produced to determine the cost per unit.
- Application of Absorption Costing
Absorption costing is used for both internal decision making and external financial reporting. This method of
costing is useful for pricing, production planning, and cost control. It is also required for external financial
reporting purposes under Generally Accepted Accounting Principles (GAAP) in the United States.

- Comparison with Variable Costing

Absorption costing is often compared with variable costing, which only considers variable costs associated with
the production of a product or service. Variable costing does not allocate fixed overhead costs to the product or
service and is often used for internal decision-making purposes.

Overall, absorption costing is a useful method of costing that provides a comprehensive view of the total cost of
production. It is important to understand the components, calculation, and application of absorption costing to
make informed decisions about pricing, production planning, and cost control.
A. Direct Costs vs. Indirect Costs
In absorption costing, it is important to distinguish between direct costs and indirect costs. Direct costs are costs
that can be traced directly to the production of a specific product or service, while indirect costs are costs that
cannot be directly traced to a specific product or service.

- Direct Costs
Direct costs are costs that are specifically associated with producing a product or service. These costs are
typically variable and vary with the level of production. Examples of direct costs include:
Direct materials: The cost of materials that are specifically used to produce a product.
Direct labor: The cost of labor that is specifically involved in producing a product.
Direct expenses: The cost of expenses that are specifically related to producing a product, such as packaging
materials or shipping costs.

- Indirect Costs
Indirect costs are costs that are not directly related to producing a specific product or service, but are necessary
for the production process. These costs are typically fixed and do not vary with the level of production. Examples
of indirect costs include:
Manufacturing overhead: The indirect costs associated with producing a product, such as rent, utilities,
depreciation, and other overhead costs.
Administrative overhead: The indirect costs associated with managing the business, such as salaries for
management and administrative staff.
Selling and marketing costs: The costs associated with promoting and selling a product or service, such as
advertising expenses and sales commissions.
In absorption costing, both direct costs and indirect costs are allocated to the production of a product or service.
This provides a more comprehensive view of the total cost of production and helps managers make informed
decisions about pricing, production planning, and cost control.
B. Fixed Costs vs. Variable Costs
In absorption costing, it is also important to distinguish between fixed costs and variable costs. Fixed costs are
costs that remain constant regardless of the level of production, while variable costs are costs that vary with the
level of production.

Fixed Costs
Fixed costs are costs that do not vary with the level of production. These costs are often considered indirect
costs and are allocated to the production of a product or service using predetermined allocation rates. Examples
of fixed costs include:

Rent: The cost of renting a facility for production or office space.

Depreciation: The cost of allocating the value of an asset over its useful life.
Salaries: The cost of paying salaries for employees who are not directly involved in the production process, such
as management or administrative staff.

Variable Costs
Variable costs are costs that vary with the level of production. These costs are often considered direct costs and
are directly associated with producing a product or service. Examples of variable costs include:

Direct materials: The cost of materials that are specifically used to produce a product.
Direct labor: The cost of labor that is specifically involved in producing a product.
Direct expenses: The cost of expenses that are specifically related to producing a product, such as packaging
materials or shipping costs.
In absorption costing, both fixed costs and variable costs are allocated to the production of a product or service.
This provides a more comprehensive view of the total cost of production and helps managers make informed
decisions about pricing, production planning, and cost control.
C. Cost of Goods Sold
The cost of goods sold (COGS) is an important concept in absorption costing. COGS is the total cost of
producing and delivering a product to a customer, and it includes both direct costs and indirect costs associated
with the production of the product.

To calculate COGS using absorption costing, the total cost of production (direct materials, direct labor, and
manufacturing overhead) is allocated to the units produced based on a predetermined allocation rate. This
allocation rate takes into account both fixed and variable costs associated with the production process.

Once the total cost of production has been allocated to the units produced, the cost per unit can be calculated.
This cost per unit is then multiplied by the number of units sold to determine the total COGS.

COGS is an important metric for businesses, as it helps determine the profitability of a product or service. By
understanding the total cost of production, businesses can make informed decisions about pricing, production
planning, and cost control. COGS is also an important factor in determining the gross profit margin, which is the
difference between revenue and COGS.
D. Inventory Valuation
Inventory valuation is another important concept in absorption costing. Under absorption costing, the cost of
producing a product includes both direct costs and indirect costs, and these costs are allocated to the units
produced based on a predetermined allocation rate. As a result, the value of inventory includes both variable and
fixed manufacturing costs.

The value of inventory is important for financial reporting purposes, as it affects the balance sheet and the
income statement. In the balance sheet, inventory is typically reported as a current asset, and the value of
inventory is used to calculate the company's working capital. In the income statement, the value of inventory is
used to calculate the cost of goods sold, which is subtracted from revenue to calculate the gross profit.

To value inventory using absorption costing, the total cost of production (direct materials, direct labor, and
manufacturing overhead) is allocated to the units produced based on a predetermined allocation rate. This
allocation rate takes into account both fixed and variable costs associated with the production process. The cost
per unit is then multiplied by the number of units in inventory to determine the total value of inventory.

It is important to note that under absorption costing, the value of inventory can be affected by changes in the
allocation rate used to allocate manufacturing overhead. If the allocation rate changes, the value of inventory will
also change, even if there is no change in the physical quantity of inventory. This can lead to fluctuations in the
reported value of inventory from one accounting period to the next.
E. Costing Methods
There are several costing methods that can be used in absorption costing. The most common methods are:
- Job Order Costing
Job order costing is a costing method used for custom or unique products. In job order costing, the cost of each
product is tracked separately. Direct materials, direct labor, and manufacturing overhead costs are all tracked
and allocated to specific jobs or products. This allows businesses to determine the exact cost of each product or
job.

- Process Costing
Process costing is a costing method used for mass-produced products. In process costing, costs are
accumulated for each production process or department. The cost of direct materials, direct labor, and
manufacturing overhead is allocated to each unit produced based on the average cost of production.
- Standard Costing
Standard costing is a costing method that uses predetermined costs for direct materials, direct labor, and
manufacturing overhead. These predetermined costs are based on estimates of the actual costs of production.
The predetermined costs are used to value inventory and calculate the cost of goods sold.
- Activity-Based Costing (ABC)
Activity-based costing (ABC) is a costing method that assigns costs based on the activities that consume
resources. The cost of each activity is assigned to the products or services that consume those activities. ABC
can provide a more accurate view of the costs of production, as it takes into account the actual resources used in
the production process.

Each costing method has its own advantages and disadvantages, and the choice of costing method will depend
on the nature of the business and the products or services being produced.
III. Components of Absorption Costing
There are three main components of absorption costing:

A. Direct Materials
Direct materials are the materials that are used to make the product and can be easily traced to the finished
product. Examples of direct materials include raw materials, components, and packaging materials.
The cost of direct materials is included in the cost of goods sold and the value of inventory under absorption
costing. The cost of direct materials is assigned to each unit produced based on the actual cost of the materials
used.

B. Direct Labor
Direct labor is the labor that is used to make the product and can be easily traced to the finished product.
Examples of direct labor include the wages of assembly line workers and machine operators.
The cost of direct labor is included in the cost of goods sold and the value of inventory under absorption costing.
The cost of direct labor is assigned to each unit produced based on the actual hours worked and the hourly wage
rate.

C. Manufacturing Overhead
Manufacturing overhead includes all of the indirect costs associated with the production process, such as rent,
utilities, depreciation, and indirect labor. These costs cannot be easily traced to individual units of production.
Under absorption costing, the cost of manufacturing overhead is allocated to each unit produced based on a
predetermined allocation rate. This allocation rate takes into account both fixed and variable manufacturing
overhead costs.
The allocation rate for manufacturing overhead is calculated by dividing the total manufacturing overhead costs
by the total number of units produced. This rate is then used to allocate manufacturing overhead costs to each
unit produced.
The cost of manufacturing overhead is included in the cost of goods sold and the value of inventory under
absorption costing. The allocation of manufacturing overhead costs can have a significant impact on the cost of
goods sold and the value of inventory.
A. Direct Material Costs
Direct material costs are the costs associated with the raw materials and components used to manufacture a
product. These costs can be easily traced to individual units of production and are included in the cost of goods
sold and the value of inventory under absorption costing.
Direct material costs include the cost of purchasing and transporting raw materials, as well as any costs
associated with storing or handling the materials. Direct material costs are assigned to each unit produced based
on the actual cost of the materials used.
For example, if a company produces 1,000 units of a product and uses $10,000 worth of raw materials, the cost
of direct materials per unit would be $10,000/1,000 units, or $10 per unit. This cost would be included in the cost
of goods sold and the value of inventory under absorption costing.
B. Direct Labor Costs
Direct labor costs are the costs associated with the wages and salaries paid to workers who are directly involved
in the production of a product. These costs can be easily traced to individual units of production and are included
in the cost of goods sold and the value of inventory under absorption costing.
Direct labor costs include the wages and salaries of workers who operate machines, assemble products, or
perform any other tasks directly related to the production process. Direct labor costs are assigned to each unit
produced based on the actual hours worked and the hourly wage rate.
For example, if a company produces 1,000 units of a product and pays its workers a total of $5,000 in wages,
and the workers worked a total of 500 hours, the direct labor cost per unit would be $5,000/1,000 units, or $5 per
unit. This cost would be included in the cost of goods sold and the value of inventory under absorption costing.
C. Manufacturing Overhead Costs
Manufacturing overhead costs are the indirect costs associated with the production of a product. These costs
cannot be easily traced to individual units of production and are allocated to each unit produced based on a
predetermined allocation rate. Manufacturing overhead costs are included in the cost of goods sold and the value
of inventory under absorption costing.
Manufacturing overhead costs include the costs of rent, utilities, depreciation, indirect labor, and any other costs
associated with the production process that cannot be directly attributed to individual units of production. These
costs are allocated to each unit produced based on a predetermined allocation rate.
The allocation rate for manufacturing overhead costs is calculated by dividing the total manufacturing overhead
costs by the total number of units produced. This rate takes into account both fixed and variable manufacturing
overhead costs. For example, if a company incurs $50,000 in total manufacturing overhead costs and produces
10,000 units of a product, the allocation rate for manufacturing overhead costs would be $5 per unit.
The cost of manufacturing overhead is allocated to each unit produced by multiplying the allocation rate by the
number of units produced. For example, if a company produces 1,000 units of a product, the total cost of
manufacturing overhead allocated to those units would be $5 per unit x 1,000 units, or $5,000. This cost would
be included in the cost of goods sold and the value of inventory under absorption costing.
D. Selling and Administrative Costs
Selling and administrative costs are the indirect costs associated with the selling and administration of a product.
These costs cannot be easily traced to individual units of production and are expensed in the period incurred
under absorption costing.
Selling costs include the costs of advertising, sales commissions, and other costs associated with selling a
product. Administrative costs include the costs of salaries and wages of administrative personnel, office rent, and
other general administrative expenses.
Unlike manufacturing overhead costs, selling and administrative costs are not allocated to individual units of
production. Instead, they are expensed in the period incurred and are not included in the cost of goods sold or
the value of inventory under absorption costing.
For example, if a company incurs $10,000 in selling and administrative costs in a given period, this amount
would be expensed in that period and would not be included in the cost of goods sold or the value of inventory
under absorption costing.
IV. Calculation of Absorption Costing
Continuing from the previous example, assume that the company had 2,000 units of the product in beginning
inventory and 1,000 units in ending inventory. The value of beginning inventory was $13,000 and the value of
ending inventory was $6,500.

Using this information, the calculation of the cost of goods sold for the period would be as follows:
Cost of goods sold = Beginning inventory + cost of goods sold - ending inventory
= $13,000 + $65,000 - $6,500
= $71,500

The cost of goods sold for the period under absorption costing is $71,500. This includes all the direct costs
(direct material and direct labor) and indirect costs (manufacturing overhead) that are required to produce the
product. The selling and administrative costs are not included in the cost of goods sold under absorption costing
and are expensed in the period incurred.
A. Total Cost of Production
The total cost of production under absorption costing includes all the costs incurred by the company to produce
the units sold during the period, whether they are direct or indirect costs. This includes the cost of direct
materials, direct labor, manufacturing overhead, and any other costs that are directly associated with the
production of the units.

To calculate the total cost of production, the company needs to add up all the costs incurred during the period.
This can be done by using the following formula:

Total cost of production = Direct material cost + Direct labor cost + Manufacturing overhead cost + Other direct
costs

Direct material cost includes the cost of all raw materials used in the production of the units. Direct labor cost
includes the wages and salaries paid to workers who are directly involved in the production of the units.
Manufacturing overhead cost includes all indirect costs that are associated with the production process, such as
rent, utilities, and depreciation on equipment. Other direct costs may include costs associated with packaging,
shipping, and other costs that are directly related to the production process.
Once the total cost of production has been calculated, it can be used to determine the cost of goods sold and the
value of ending inventory. The cost of goods sold is calculated by subtracting the value of ending inventory from
the sum of the beginning inventory and the cost of goods produced. The value of ending inventory is calculated
by multiplying the number of units in ending inventory by the unit cost of production.
B. Total Cost of Goods Sold
The total cost of goods sold under absorption costing includes all the costs associated with the production of the
units that were sold during the period, including direct and indirect costs. To calculate the total cost of goods
sold, the company needs to add up the cost of goods produced during the period and adjust for any changes in
inventory levels.

The formula for calculating the total cost of goods sold under absorption costing is as follows:

Total cost of goods sold = Beginning inventory + Cost of goods produced - Ending inventory

Beginning inventory refers to the value of the inventory that was held by the company at the beginning of the
period. Cost of goods produced refers to the total cost of all the units that were produced during the period.
Ending inventory refers to the value of the inventory that was held by the company at the end of the period.
For example, if the beginning inventory value was $20,000, the cost of goods produced during the period was
$100,000, and the ending inventory value was $15,000, then the total cost of goods sold under absorption
costing would be:

Total cost of goods sold = $20,000 + $100,000 - $15,000

= $105,000

This means that the company incurred a total cost of $105,000 to produce and sell the units during the period.
The total cost of goods sold is used to calculate the gross profit and the operating income of the company.
C. Unit Cost of Production
The unit cost of production under absorption costing includes all the costs incurred by the company to produce
one unit of the product, including direct and indirect costs. To calculate the unit cost of production, the company
needs to divide the total cost of production by the number of units produced during the period.

The formula for calculating the unit cost of production is as follows:

Unit cost of production = Total cost of production / Number of units produced

For example, if the total cost of production for a period is $100,000 and the number of units produced during the
period is 10,000, then the unit cost of production would be:

Unit cost of production = $100,000 / 10,000 units

= $10 per unit

The unit cost of production is used to value the inventory and to determine the cost of goods sold. The cost of
goods sold is calculated by multiplying the number of units sold by the unit cost of production. The value of
ending inventory is calculated by multiplying the number of units in ending inventory by the unit cost of
production.
D. Break-even Point
The break-even point is the level of sales at which the company's total revenue is equal to its total costs,
resulting in zero profit. In other words, it is the point at which the company is neither making a profit nor incurring
a loss. The break-even point can be calculated using absorption costing by determining the contribution margin
per unit and dividing the total fixed costs by the contribution margin per unit.

The formula for calculating the break-even point under absorption costing is as follows:

Break-even point (in units) = Total fixed costs / Contribution margin per unit

The contribution margin per unit is the difference between the unit selling price and the unit variable cost. The
unit variable cost includes all the variable costs associated with the production of one unit of the product, such as
direct materials, direct labor, and variable overhead costs.
For example, if the unit selling price is $50 and the unit variable cost is $20, then the contribution margin per unit
would be:

Contribution margin per unit = Unit selling price - Unit variable cost
= $50 - $20
= $30

If the total fixed costs for the period were $60,000, then the break-even point in units would be:

Break-even point (in units) = $60,000 / $30

= 2,000 units

This means that the company needs to sell 2,000 units of the product to break even and cover all its fixed costs.
Any sales above this level will result in a profit, while sales below this level will result in a loss. The break-even
point is an important tool for managers to assess the profitability of their business and to plan their operations
accordingly.
V. Application of Absorption Costing
Absorption costing is widely used by businesses of all sizes and across different industries to determine the cost
of their products or services. It is particularly useful for businesses that produce a variety of products or services
and have multiple cost centers. Here are some common applications of absorption costing:
Costing and Pricing Decisions: Absorption costing provides a more accurate picture of the total cost of
production, which is crucial for pricing decisions. By including all direct and indirect costs in the calculation, the
company can ensure that the selling price covers all the costs and results in a profit.

Budgeting and Planning: Absorption costing is an essential tool for budgeting and planning purposes. By
understanding the total cost of production, the company can set realistic targets and allocate resources
accordingly. It also helps to identify areas of inefficiency and potential cost savings.

Performance Evaluation: Absorption costing is useful for evaluating the performance of different products or cost
centers within the organization. By comparing the unit costs and profit margins of different products or services,
the company can identify areas of strength and weakness and take corrective actions.

Tax Purposes: Absorption costing is also used for tax purposes. Many tax authorities require companies to use
absorption costing for calculating their taxable income.

Financial Reporting: Absorption costing is used for financial reporting purposes, particularly for the preparation of
the income statement and balance sheet. The cost of goods sold calculated under absorption costing is used to
determine the gross profit and operating income of the company.

Overall, absorption costing provides a comprehensive and accurate view of the total cost of production, which is
essential for making informed business decisions. It also helps to ensure that the selling price covers all the
costs and results in a profit, which is critical for the long-term sustainability of the business.
A. Advantages and Disadvantages
Advantages:

Comprehensive Costing: Absorption costing takes into account all the costs involved in the production of a
product or service, including direct costs, indirect costs, and fixed costs. This provides a more accurate picture of
the total cost of production and helps in setting appropriate prices.
Income Statement Clarity: Absorption costing provides a clear and concise income statement, which shows the
cost of goods sold, gross profit, and operating income. This is particularly useful for financial reporting purposes
and helps in comparing the performance of different products or services.
Suitable for External Reporting: Absorption costing is widely accepted by regulatory bodies and tax authorities,
making it suitable for external reporting purposes.

Disadvantages:

Fixed Overhead Allocation: One of the major disadvantages of absorption costing is the allocation of fixed
overhead costs. Fixed overhead costs are allocated to products based on a predetermined rate, which may not
reflect the actual usage of the cost by the products. This can lead to distorted product costs and incorrect pricing
decisions.
Difficulty in Cost Control: Absorption costing can make it difficult to control costs, particularly indirect costs. Since
all indirect costs are allocated to products, it can be difficult to identify the actual cost drivers and take corrective
actions.
Manipulation of Results: Absorption costing can be manipulated by managers to achieve desired results. For
example, managers may choose to overproduce a product to reduce the unit cost, or allocate higher overhead
costs to products with higher margins to inflate profits.
Does Not Consider Opportunity Cost: Absorption costing does not consider the opportunity cost of using
resources. For example, if a machine is used to produce one product, it cannot be used to produce another
product, which represents an opportunity cost that is not accounted for in absorption costing.

Overall, absorption costing has its advantages and disadvantages, and it is important for businesses to
understand these before deciding to use it as their costing method. Managers should carefully evaluate the costs
and benefits of absorption costing and consider the specific needs of their business before making a decision.
B. Comparison with Variable Costing
Variable costing is another method of costing that differs from absorption costing. While absorption costing
allocates both fixed and variable costs to products, variable costing only allocates variable costs to products, and
fixed costs are treated as period costs and are expensed in the period incurred.

Here are some key differences between absorption costing and variable costing:

Treatment of Fixed Costs: As mentioned, absorption costing allocates fixed costs to products, while variable
costing treats them as period costs. This can lead to differences in product costs and profitability depending on
the level of production.

Inventory Valuation: Absorption costing values inventory at full cost, which includes both fixed and variable costs.
In contrast, variable costing only includes variable costs in the inventory valuation. This can result in differences
in inventory valuation and income statement presentation.

Break-Even Point: The break-even point calculated using absorption costing and variable costing can differ due
to the treatment of fixed costs. The break-even point calculated using absorption costing is typically lower than
the break-even point calculated using variable costing, since fixed costs are allocated to products in absorption
costing.

Decision Making: The use of absorption costing or variable costing can affect decision making, particularly when
it comes to pricing decisions. Absorption costing may result in higher unit costs for products with low production
volumes, while variable costing may result in higher unit costs for products with high production volumes.
Overall, absorption costing and variable costing have their unique advantages and disadvantages, and
businesses should choose the method that best suits their needs. While absorption costing provides a more
comprehensive view of product costs, it may not be as useful for decision making. On the other hand, variable
costing may be simpler to use and may provide a better understanding of the impact of changes in production
volume on profitability.
C. Absorption Costing in Decision Making
Absorption costing can be used in decision making in several ways, including:

Pricing Decisions: Absorption costing can be used to determine the full cost of producing a product, including
both variable and fixed costs. This information can be used to make informed pricing decisions, ensuring that
prices cover all costs and generate a profit.
Product Mix Decisions: By analyzing the costs associated with producing different products using absorption
costing, businesses can make informed decisions about which products to produce and in what quantities. This
can help businesses maximize their profits by producing products with the highest contribution margins.
Make or Buy Decisions: Absorption costing can be used to determine the full cost of producing a product in-
house, which can be compared to the cost of outsourcing production. This information can be used to make
informed make or buy decisions, ensuring that the most cost-effective option is chosen.
Investment Decisions: Absorption costing can be used to analyze the costs associated with investing in new
equipment or expanding production capacity. By analyzing the expected costs and revenues associated with the
investment using absorption costing, businesses can make informed investment decisions.

Overall, absorption costing provides a comprehensive view of product costs, which can be used in decision
making across a range of areas, including pricing, product mix, make or buy, and investment decisions. By
considering all costs associated with production, businesses can make informed decisions that maximize their
profits and ensure long-term success.
D. Implications for Financial Statements
The use of absorption costing can have implications for financial statements, particularly in the areas of inventory
valuation and cost of goods sold.

Inventory Valuation: Absorption costing values inventory at full cost, which includes both fixed and variable costs.
This can result in higher inventory valuations compared to other costing methods, such as variable costing. As a
result, companies using absorption costing may report higher assets on their balance sheet and higher net
income on their income statement.
Cost of Goods Sold: The cost of goods sold calculated using absorption costing includes both fixed and variable
costs. This can result in lower cost of goods sold compared to variable costing, particularly when production
volumes are high. As a result, companies using absorption costing may report higher gross margins on their
income statement.
Impact of Production Volume: The use of absorption costing can result in significant fluctuations in the cost of
goods sold and net income as production volumes change. This is because fixed costs are allocated to products
based on the level of production, which can lead to significant changes in the cost of goods sold and net income
as production volumes fluctuate.
Overall, the use of absorption costing can have significant implications for financial statements, particularly in the
areas of inventory valuation and cost of goods sold. Companies should carefully consider the impact of
absorption costing on their financial statements and may need to provide additional disclosures to help investors
understand the impact of absorption costing on their financial results.
VI. Conclusion
In conclusion, absorption costing is a widely used costing method that assigns all direct and indirect costs to
products or services, including fixed overhead costs. This method provides a comprehensive view of product
costs and can be useful in decision making, pricing, and product mix decisions.

However, absorption costing has its advantages and disadvantages, and companies should carefully consider
the impact of this costing method on their financial statements. Additionally, absorption costing should not be
used in isolation and should be supplemented with other costing methods, such as variable costing, to provide a
more complete view of costs and profitability.

Overall, absorption costing remains a popular and useful costing method for many businesses and can help
companies make informed decisions and maximize their profits.
A. Summary of Absorption Costing
Absorption costing is a costing method used by companies to determine the total cost of producing a product or
service. It includes all direct costs, such as materials and labor, as well as indirect costs, such as overhead,
utilities, and depreciation.

The purpose of absorption costing is to provide a comprehensive view of the cost of production, and to allocate
all costs, including fixed overhead costs, to products or services. This method is particularly useful in decision
making, pricing, and product mix decisions.

Absorption costing has several components, including direct material costs, direct labor costs, manufacturing
overhead costs, and selling and administrative costs. These components are used to calculate the total cost of
production, total cost of goods sold, and unit cost of production.

The use of absorption costing has implications for financial statements, particularly in the areas of inventory
valuation and cost of goods sold. Companies should carefully consider the impact of absorption costing on their
financial statements and may need to provide additional disclosures to help investors understand the impact of
absorption costing on their financial results.

Overall, absorption costing remains a popular and useful costing method for many businesses, providing a
comprehensive view of production costs and helping companies make informed decisions and maximize their
profits.
B. Future Trends
There are several future trends that may impact the use of absorption costing in the coming years:
Increased use of automation: With the rise of automation and advanced manufacturing technologies, the
proportion of manufacturing overhead costs in total production costs may decline. This could lead to a greater
reliance on variable costing methods, which do not allocate fixed overhead costs to products.
Greater focus on sustainability: As companies increasingly focus on sustainability and environmental impact,
there may be a need for new cost accounting methods that take into account the environmental costs of
production. This could lead to a greater use of activity-based costing and other methods that allocate costs
based on the environmental impact of production.
Greater use of digital technologies: The rise of digital technologies, such as artificial intelligence and machine
learning, may enable companies to more accurately track and allocate costs to products. This could lead to more
sophisticated costing methods and a greater reliance on automation.
Shift towards service-based business models: As more companies shift towards service-based business models,
there may be a need for new costing methods that take into account the unique costs associated with service
delivery. This could lead to a greater use of activity-based costing and other methods that allocate costs based
on the specific activities involved in service delivery.
Overall, while absorption costing remains a popular and widely used costing method, it is likely to evolve in
response to changing business and technological trends in the coming years.
C. Limitations and Criticisms of Absorption Costing
There are several limitations and criticisms of absorption costing, including:
Overemphasizes production volume: Absorption costing allocates fixed overhead costs to products based on
production volume, which can lead to overemphasis on producing large quantities of products to spread out fixed
costs. This can result in suboptimal decision-making and a lack of focus on improving production efficiency.
Ignores opportunity costs: Absorption costing does not take into account opportunity costs, which are the
potential benefits that could have been gained from using resources for alternative purposes. This can lead to
inaccurate cost estimates and suboptimal decision-making.
Difficult to use in dynamic environments: Absorption costing is less useful in dynamic environments where
production volumes and product mix change frequently. The allocation of fixed overhead costs to products may
become distorted and inaccurate, leading to poor decision-making.
Can result in inventory valuation distortions: Absorption costing can result in inventory valuation distortions,
particularly in situations where production volumes fluctuate significantly. This can result in misleading financial
statements and a lack of transparency for investors.
May lead to overproduction: Absorption costing can encourage overproduction, as companies may produce more
products than necessary to spread out fixed costs. This can result in excess inventory and wasted resources.
Overall, while absorption costing remains a useful costing method for many businesses, it is important to be
aware of its limitations and potential drawbacks. Companies should carefully evaluate the appropriateness of
absorption costing for their specific business environment and be prepared to supplement it with other costing
methods when necessary.

Example of absorption costing method:

Assume a company produces only one product, called Product A. The following information is available for the
year ended December 31, 2022:
Direct materials used: $50,000
Direct labor cost: $30,000
Variable overhead: $10,000
Fixed overhead: $20,000
Sales revenue: $120,000
Beginning inventory: 1,000 units
Ending inventory: 500 units
Number of units produced: 2,000
Using absorption costing, we need to allocate fixed overhead costs to the product based on the production
volume. The total cost of production can be calculated as follows:

Direct materials + Direct labor + Variable overhead + (Fixed overhead / Number of units produced) = Total cost
per unit

$50,000 + $30,000 + $10,000 + ($20,000 / 2,000) = $60 per unit

Using this total cost per unit, we can calculate the total cost of goods sold and the cost of ending inventory.

Cost of goods sold = Beginning inventory + Units produced - Ending inventory x Total cost per unit
= 1,000 + 2,000 - 500 x $60
= $150,000

Cost of ending inventory = Ending inventory x Total cost per unit

= 500 x $60
= $30,000

Using this information, we can calculate the gross profit and net income for the year.

Gross profit = Sales revenue - Cost of goods sold

= $120,000 - $150,000
= -$30,000

Net income = Gross profit - Selling and administrative expenses

= -$30,000 - $10,000
= -$40,000
As we can see from this example, absorption costing allocated fixed overhead costs to the product based on
production volume, resulting in a total cost per unit of $60. This total cost per unit was then used to calculate the
cost of goods sold and the cost of ending inventory. However, in this example, the company incurred a loss of
$40,000 for the year, indicating that the selling price may not have been high enough to cover all of the costs
associated with producing the product.

Example of absorption costing method:

Assume a company produces two products, called Product X and Product Y. The following information is
available for the year ended December 31, 2022:

Direct materials used for Product X: $40,000

Direct materials used for Product Y: $60,000
Direct labor cost for Product X: $20,000
Direct labor cost for Product Y: $30,000
Variable overhead for Product X: $5,000
Variable overhead for Product Y: $10,000
Fixed overhead: $30,000
Sales revenue for Product X: $100,000
Sales revenue for Product Y: $150,000
Beginning inventory for Product X: 500 units
Beginning inventory for Product Y: 1,000 units
Ending inventory for Product X: 250 units
Ending inventory for Product Y: 500 units
Number of units produced for Product X: 1,500
Number of units produced for Product Y: 2,000
Using absorption costing, we need to allocate fixed overhead costs to each product based on the production
volume. The total cost of production for each product can be calculated as follows:

Total direct costs + Total overhead costs / Number of units produced = Total cost per unit

Product X:
$40,000 + $20,000 + $5,000 + ($30,000 / 1,500) = $61 per unit

Product Y:
$60,000 + $30,000 + $10,000 + ($30,000 / 2,000) = $81 per unit
Using these total cost per unit, we can calculate the total cost of goods sold and the cost of ending inventory for
each product.

Product X:
Cost of goods sold = Beginning inventory + Units produced - Ending inventory x Total cost per unit
= 500 + 1,500 - 250 x $61
= $111,750

Cost of ending inventory = Ending inventory x Total cost per unit

= 250 x $61
= $15,250

Product Y:
Cost of goods sold = Beginning inventory + Units produced - Ending inventory x Total cost per unit
= 1,000 + 2,000 - 500 x $81
= $203,500

Cost of ending inventory = Ending inventory x Total cost per unit

= 500 x $81
= $40,500

Using this information, we can calculate the gross profit and net income for the year for each product.

Product X:
Gross profit = Sales revenue - Cost of goods sold
= $100,000 - $111,750
= -$11,750

Net income = Gross profit - Selling and administrative expenses

= -$11,750 - $5,000
= -$16,750

Product Y:
Gross profit = Sales revenue - Cost of goods sold
= $150,000 - $203,500
= -$53,500
Net income = Gross profit - Selling and administrative expenses
= -$53,500 - $10,000
= -$63,500

As we can see from this example, absorption costing allocated fixed overhead costs to each product based on
production volume, resulting in a total cost per unit of $61 for Product X and $81 for Product Y. These total costs
per unit were then used to calculate the cost of goods sold and the cost of ending inventory for each product.
However, in this example, both products incurred losses, indicating that the selling prices may not have been
high enough to cover all of the costs associated with producing the products.

Comprehensive example in absorption coating method with solution

Sure, here's a comprehensive example of absorption costing:

ABC Company produces and sells Product A. The company uses absorption costing and has the following
information for the year:

Direct materials cost per unit: $10

Direct labor cost per unit: $15
Variable manufacturing overhead cost per unit: $5
Fixed manufacturing overhead cost for the year: $200,000
Variable selling and administrative cost per unit: $2
Fixed selling and administrative cost for the year: $50,000
Units produced: 10,000
Units sold: 8,000
Selling price per unit: $50

Using this information, let's calculate the following:

A. Total cost of production
B. Total cost of goods sold
C. Unit cost of production
D. Break-even point

Solution:

A. Total cost of production:

Direct materials cost per unit x Units produced = $10 x 10,000 = $100,000
Direct labor cost per unit x Units produced = $15 x 10,000 = $150,000
Variable manufacturing overhead cost per unit x Units produced = $5 x 10,000 = $50,000
Fixed manufacturing overhead cost = $200,000
Total manufacturing cost = $500,000

Variable selling and administrative cost per unit x Units produced = $2 x 10,000 = $20,000
Fixed selling and administrative cost = $50,000
Total selling and administrative cost = $70,000

Total cost of production = Total manufacturing cost + Total selling and administrative cost
= $500,000 + $70,000
= $570,000

B. Total cost of goods sold:

To calculate the total cost of goods sold, we need to calculate the cost of goods manufactured (COGM) first.

COGM = Total cost of production + Beginning inventory of finished goods - Ending inventory of finished goods

Beginning inventory of finished goods = 0 (given)

Ending inventory of finished goods = Units produced - Units sold
= 10,000 - 8,000
= 2,000

COGM = $570,000 + 0 - $30,000 (2,000 units x $15 per unit)

= $540,000

Total cost of goods sold = COGM - Beginning inventory of finished goods

= $540,000 - 0
= $540,000

C. Unit cost of production:

Unit cost of production = Total cost of production ÷ Units produced
= $570,000 ÷ 10,000
= $57

D. Break-even point:
To calculate the break-even point, we need to first calculate the contribution margin per unit.
Contribution margin per unit = Selling price per unit - Variable cost per unit
= $50 - ($10 + $15 + $5 + $2)
= $8

Next, we calculate the contribution margin ratio:

Contribution margin ratio = Contribution margin per unit ÷ Selling price per unit
= $8 ÷ $50
= 0.16

Finally, we can calculate the break-even point in units:

Break-even point (units) = Fixed costs ÷ Contribution margin per unit

= ($200,000 + $50,000) ÷ $8
= 31,250

Therefore, ABC Company needs to sell 31,250 units to break even.

I. Introduction to Absorption Costing Method

A. Definition
B. Importance
C. Historical development

II. Key Concepts in Absorption Costing Method

A. Direct and Indirect Costs
B. Variable and Fixed Costs
C. Cost Behavior

III. Components of Absorption Costing Method

A. Direct Materials
B. Direct Labor
C. Manufacturing Overhead
1. Indirect Materials
2. Indirect Labor
3. Other Overhead Costs
IV. Absorption Costing Method Calculation
A. Calculating Unit Product Cost
B. Calculating Gross Profit
C. Calculating Net Income

V. Advantages and Disadvantages of Absorption Costing Method

A. Advantages
B. Disadvantages

VI. Comparison with Other Costing Methods

A. Variable Costing Method
B. Marginal Costing Method

VII. Applications of Absorption Costing Method

A. Decision Making
B. Financial Reporting

VIII. Conclusion and Future Directions

A. Summary of Key Points
B. Future Developments in Absorption Costing Method
I. Introduction to Absorption Costing Method
A. Definition
Absorption costing is a traditional costing method used to allocate all production costs, including both variable
and fixed costs, to the final product. This method is also known as full costing or full absorption costing. The idea
behind absorption costing is to absorb all costs of production, including those that cannot be directly traced to the
product, into the cost of the product.

B. Importance
Absorption costing is an essential tool for cost accounting and financial reporting, as it provides a comprehensive
view of the true cost of producing a product. By allocating both direct and indirect costs to the final product,
companies can accurately calculate the unit cost of production and use this information to make informed
decisions about pricing, production volumes, and profitability.

C. Historical Development
Absorption costing has been used in manufacturing industries for over a century. It emerged in the early 1900s
as a way for companies to determine the full cost of production, including indirect costs. Over time, it has evolved
and become a standard practice in the accounting industry, used to calculate the cost of goods sold and
inventory values for financial reporting purposes.
II. Key Concepts in Absorption Costing Method
A. Direct and Indirect Costs
Direct costs are those that can be directly traced to the production of a product, such as direct materials and
direct labor. Indirect costs are those that cannot be directly traced to the product, such as overhead costs like
rent, utilities, and administrative expenses.

B. Variable and Fixed Costs

Variable costs are those that vary with the level of production, such as direct materials and direct labor. Fixed
costs are those that remain constant regardless of the level of production, such as rent, depreciation, and
insurance.

C. Cost Behavior
Understanding the behavior of costs is critical to absorption costing. Some costs behave differently at different
levels of production, and it's important to understand how costs will change as production levels fluctuate. For
example, direct labor costs may increase proportionally as production increases, while fixed costs like rent and
depreciation remain constant regardless of the level of production.

By understanding the behavior of costs, companies can make more informed decisions about pricing, production
volumes, and profitability.

III. Components of Absorption Costing Method

A. Direct Materials
Direct materials are those materials that are used to make a product and can be directly traced to the final
product. Examples of direct materials include raw materials, components, and sub-assemblies.

B. Direct Labor
Direct labor refers to the cost of labor that is directly involved in the production of a product. This includes wages,
salaries, and benefits for production workers who are involved in the manufacturing process.

C. Manufacturing Overhead
Manufacturing overhead includes all other costs associated with production that cannot be directly traced to the
product. This includes indirect materials, indirect labor, and other overhead costs.

Indirect Materials
Indirect materials are materials that are used in the production process but cannot be directly traced to the final
product. Examples of indirect materials include lubricants, cleaning supplies, and other small items used in the
manufacturing process.
Indirect Labor
Indirect labor includes the wages, salaries, and benefits for employees who are not directly involved in the
production process but are still necessary to keep the production process running smoothly. Examples of indirect
labor include maintenance workers, janitors, and supervisors.

Other Overhead Costs

Other overhead costs include all other costs associated with production that cannot be directly traced to the
product. Examples of other overhead costs include rent, utilities, insurance, and depreciation of equipment.

In absorption costing, all of these components are included in the calculation of the unit product cost. The total
manufacturing overhead cost is allocated to the final product based on a predetermined overhead rate, which is
calculated by dividing the total estimated manufacturing overhead cost by the estimated level of production for a
given period.

The predetermined overhead rate is then used to allocate overhead costs to each unit of product based on the
actual level of production. By including all of these components in the calculation of the unit product cost,
absorption costing provides a more accurate picture of the true cost of production than other costing methods
that do not include all overhead costs in the cost of the product.

IV. Absorption Costing Method Calculation

A. Calculating Unit Product Cost
To calculate the unit product cost using absorption costing, all direct materials, direct labor, and manufacturing
overhead costs are added together and then divided by the total number of units produced during the period.

Unit Product Cost = (Direct Materials + Direct Labor + Manufacturing Overhead) / Number of Units Produced

The manufacturing overhead cost is allocated to each unit of product using a predetermined overhead rate,
which is calculated by dividing the total estimated manufacturing overhead cost by the estimated level of
production for a given period.

Predetermined Overhead Rate = Estimated Manufacturing Overhead Cost / Estimated Level of Production

The predetermined overhead rate is then used to allocate the actual manufacturing overhead cost to each unit of
product based on the actual level of production.

B. Calculating Gross Profit

Gross profit is calculated by subtracting the cost of goods sold (COGS) from the total sales revenue.
Gross Profit = Total Sales Revenue - Cost of Goods Sold

The COGS is calculated by multiplying the unit product cost by the number of units sold during the period.

COGS = Unit Product Cost x Number of Units Sold

C. Calculating Net Income

Net income is calculated by subtracting all operating expenses from the gross profit.

Net Income = Gross Profit - Operating Expenses

Operating expenses include all expenses related to running the business, such as rent, utilities, salaries, and
advertising.

By using absorption costing, companies can calculate a more accurate net income by including all overhead
costs in the cost of the product, which provides a more accurate picture of the true cost of production.

V. Advantages and Disadvantages of Absorption Costing Method

A. Advantages of Absorption Costing Method
Provides a more accurate picture of the true cost of production: Absorption costing takes into account all costs
associated with the production of a product, including direct materials, direct labor, and manufacturing overhead
costs. This provides a more accurate picture of the true cost of production than other costing methods that do not
include all overhead costs in the cost of the product.

Helps with pricing decisions: Absorption costing can help companies make more informed decisions about
pricing by providing a clear picture of the total cost of production.

Required for financial reporting: Absorption costing is required for financial reporting purposes under Generally
Accepted Accounting Principles (GAAP) in the United States.

B. Disadvantages of Absorption Costing Method

May lead to overproduction: Since fixed manufacturing overhead costs are allocated to each unit of product,
producing more units can lower the per-unit cost of production. This may incentivize companies to produce more
units than they actually need, which can lead to overproduction and excess inventory.

Ignores the time value of money: Absorption costing does not take into account the time value of money, which
can distort profitability calculations over long periods of time.
Can be complex and time-consuming: Absorption costing requires the allocation of manufacturing overhead
costs using a predetermined overhead rate, which can be a complex and time-consuming process. This can lead
to errors and inaccuracies if the allocation process is not done correctly.

May not reflect actual production costs: Absorption costing assumes that all overhead costs are directly related
to production, but this may not always be the case. Some overhead costs, such as administrative expenses, may
not be directly related to production and may not accurately reflect the actual cost of production.

VI. Comparison with Other Costing Methods

Absorption costing is just one of several costing methods available to businesses. Here are some key differences
between absorption costing and other popular costing methods:

A. Variable Costing
Variable costing only includes variable manufacturing costs, such as direct materials and direct labor, in the cost
of the product. Fixed manufacturing overhead costs are treated as period costs and are not included in the cost
of the product. As a result, variable costing can provide a clearer picture of how changes in production volume
impact profitability, but it does not provide a full picture of the true cost of production.
B. Activity-Based Costing (ABC)
Activity-based costing allocates manufacturing overhead costs based on the specific activities that drive those
costs. This method can provide a more accurate picture of the true cost of production, especially for businesses
that have complex or diverse product lines. However, ABC can be more time-consuming and complex to
implement than absorption costing.

C. Direct Costing
Direct costing only includes direct costs, such as direct materials and direct labor, in the cost of the product. Like
variable costing, fixed manufacturing overhead costs are treated as period costs and are not included in the cost
of the product. Direct costing can be useful for short-term decision-making, but it does not provide a full picture of
the true cost of production.

D. Standard Costing
Standard costing uses predetermined standards to estimate the cost of direct materials, direct labor, and
manufacturing overhead. The actual costs are then compared to the standard costs to identify areas where costs
can be reduced. Standard costing can be useful for budgeting and performance evaluation, but it does not
provide a full picture of the true cost of production like absorption costing.

VII. Applications of Absorption Costing Method

Absorption costing method is widely used in various industries and can be applied in different ways, including:
Cost Analysis: Absorption costing can be used to analyze the costs associated with the production of a particular
product, allowing companies to identify areas where costs can be reduced.

Pricing: Companies can use absorption costing to set prices for their products by adding up all of the costs
associated with production and adding a markup for profit.

Budgeting: Absorption costing can be used to create budgets for manufacturing departments or the entire
company, by estimating the costs associated with producing a certain amount of products.

Performance Evaluation: Absorption costing can be used to evaluate the performance of manufacturing
departments or the company as a whole by comparing the actual costs with the budgeted costs.

Inventory Valuation: Absorption costing is used to value inventory for financial reporting purposes, which is
required under GAAP.

Decision-making: Companies can use absorption costing to make informed decisions about production volume,
outsourcing, and other operational decisions.

Overall, absorption costing is a useful tool for companies looking to gain a better understanding of the true cost
of production and make informed decisions about pricing, budgeting, and performance evaluation.

VIII. Conclusion and Future Directions

Absorption costing is a widely used costing method that provides a more accurate picture of the true cost of
production than other costing methods. By allocating all manufacturing overhead costs to the cost of the product,
absorption costing can help companies make informed decisions about pricing, budgeting, and performance
evaluation. However, absorption costing does have its limitations, including its complexity and the potential for
overproduction.

In the future, there may be advancements in costing methods that address some of the limitations of absorption
costing, such as incorporating the time value of money and improving the accuracy of overhead cost allocation.
Additionally, with the growing emphasis on sustainability and environmental impact, there may be a need for
costing methods that factor in the environmental costs of production.

Overall, absorption costing will likely continue to be a valuable tool for companies looking to gain a better
understanding of their production costs and make informed decisions about their operations. As technology and
business practices continue to evolve, there may be opportunities to further refine and improve the absorption
costing method to better meet the needs of businesses in the future.