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Absorption costing

Absorption costing includes direct production costs and both variable and fixed production overhead in product cost. Finished-goods inventory therefore carries an assigned share of fixed production overhead until the units are sold. Selling and administration costs are normally charged separately as period costs in the costing statement. Predetermined rates may require under- or over-absorption adjustments. Full production cost is not necessarily the full cost of serving a customer or an appropriate minimum price for every decision.

Worked example

Produce 100 units with $8 variable cost and $2 absorbed fixed overhead per unit. Selling 80 units leaves inventory of $200 on the absorption basis.

Common mistake

An absorption cost allocation is not automatically a relevant cash outflow for a one-off decision.

Where it appears in your exams

QualificationExamRelationshipPeriod
ACCA MA Direct September 2026–June 2027
FIA FMA Direct September 2026–June 2027