Absorption Costing Law and Legal Definition

Absorption costing is an accounting practice in which fixed and variable costs of production are absorbed by different cost centers. It is a managerial accounting cost method of expensing all costs associated with manufacturing a particular product. Absorption costing uses the total direct costs and overhead costs associated with manufacturing a product as the cost base. Generally accepted accounting principles (GAAP) require absorption costing for external reporting. Absorption costing is also known as full absorption costing.