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

ByHoang TruongUpdated June 30, 2026

FrameworkAbsorption costing

See it move

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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.

Where it fits

SubjectCost AccountingCoreTopicAbsorption & Variable CostingCore

The formula

LaTeX

c_{abs} = DM + DL + VOH + \frac{FOH}{Q}

Variables

$c_{ab s}$: Absorption unit cost (€ per unit)
$D M$: Direct materials cost per unit (€ per unit)
$D L$: Direct labour cost per unit (€ per unit)
$V O H$: Variable overhead per unit (€ per unit)
$F O H$: Total fixed manufacturing overhead (€)
$Q$: Budgeted production units (units)

Fixed overhead is spread across all budgeted units, so unsold units carry a share of it to inventory.

LaTeX

r_{FOH} = \frac{FOH}{Q}

Variables

$r_{F O H}$: Fixed overhead rate (€ per unit)
$F O H$: Total fixed manufacturing overhead (€)
$Q$: Budgeted production units (units)

This rate is applied per unit produced when absorbing fixed overhead into product cost.

Check yourself

PracticeCORE

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?

Select an answer to check your understanding.

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.