Absorption costing
Absorption costing, also called full costing, assigns all manufacturing costs to each unit produced: direct materials, direct labour, variable overhead, and a share of fixed manufacturing overhead.
Also known asfull costing
FrameworkAbsorption costing
What it is
See it move
A split bar divides the €17 absorption unit cost into two segments: €12 covering variable costs (direct materials, direct labour, and variable overhead) and €5 representing the fixed overhead share. Both portions load onto every unit produced, so 1,000 unsold units carry €5,000 of fixed overhead on the balance sheet as inventory — that cost reaches the income statement only when those units are eventually sold.
The formula
Variables
- Absorption unit cost (€ per unit)
- Direct materials cost per unit (€ per unit)
- Direct labour cost per unit (€ per unit)
- Variable overhead per unit (€ per unit)
- Total fixed manufacturing overhead (€)
- Budgeted production units (units)
Fixed overhead is spread across all budgeted units, so unsold units carry a share of it to inventory.
Variables
- Fixed overhead rate (€ per unit)
- Total fixed manufacturing overhead (€)
- Budgeted production units (units)
This rate is applied per unit produced when absorbing fixed overhead into product cost.
If you trained under a national GAAP
DE · HGBWhere national-GAAP intuition diverges from the international standard
HGB (German)
Under the HGB, inventory measurement rules permit preparers to include only direct material and direct labour costs at a minimum, making the inclusion of fixed manufacturing overhead a matter of accounting policy choice rather than obligation. Conservative firms may therefore carry stock at a lower cost, deferring less fixed overhead into unsold inventory and recording it as a period expense instead.
IFRS
IAS 2 makes absorption costing mandatory: fixed production overhead must be included in the cost of inventories and allocated on the basis of normal production capacity. Allocating on actual volume during an abnormally low-output period is not permitted, as doing so would load an excessive share of overhead onto remaining stock and misstate cost of sales in normal periods.
Edlintics’ own explanatory summary — not official IFRS Foundation or national standard-setter guidance.
Check yourself
A factory produces 10,000 units in a period but sells only 8,000. Total fixed manufacturing overhead is €40,000; variable cost is €15 per unit. Under absorption costing, how much fixed manufacturing overhead is recognised as an expense in the income statement this period?