What is the meaning of absorption and example of it?

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1235378

2026-03-31 09:46

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I'm assuming you are talking about Absorption costing which is essentially the opposite of Variable Costing.

Absorption Costing: Where all costs (Direct and Indirect) related to producing (Not Selling & Admin) a product are distributed evenly into the cost of the goods.

Lets say we only used $5 worth of materials and $2.50 worth of labour to make a doll. There is also $1000 worth of fixed expenses related to making the doll.

Under Variable Costing: the cost of making a doll is only the variable costs. Hence, the cost of 1 doll is 5+2.50 = $7.50/doll

Under Absorption costing: Lets say we made 100 dolls ($10/doll worth of Fixed costs). The total cost of a doll would therefore but 5 + 2.50 + 10 = $17.50/doll

I guess you could say that it absorbs the ALL the costs of manufacturing.

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