Absorption Costing

Tax Glossary Definition

Absorption Costing

Absorption Costing – A cost accounting method under which all manufacturing costs — direct materials, direct labor, and both variable and fixed production overheads — are incorporated into the total cost of goods manufactured. This approach is mainly used for valuing inventory and preparing external financial statements.

Example: If material costs are ₹2,00,000, labor ₹1,00,000, and overheads ₹50,000, the total absorbed cost of production amounts to ₹3,50,000.

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