Absorption Costing
Definition
A costing method where ALL of a company’s overhead costs are spread across its products, making each product carry a share of the total expenses.
Example
Example 1:
A Lagos bottled water company spreads its factory rent, electricity, and staff salaries across every bottle it produces, so each bottle’s price reflects a portion of all overhead costs, which is the essence of absorption costing.
Example 2:
A car manufacturer in Detroit divides its total factory overhead, machinery maintenance, supervisors’ salaries, and utility bills across every vehicle produced, ensuring all costs are fully absorbed into each car’s final price.