UK Accounting Glossary
A method of calculating the cost of a product or enterprise by taking into account indirect expenses (overheads) as well as direct costs.
This is the cost accounting system in which the overheads of an organisation are charged to the production by means of the absorption process.
Costs are first apportioned to cost centres, where they are absorbed using absorption rates.
Although this method is simple; it invokes an essentially arbitrary allocation of costs; as such the activity-based costing system of accounting is now widely preferred.
Is the method under which all manufacturing costs, both variable and fixed, are treated as product costs with non-manufacturing costs, e.g. selling and administrative expenses, being treated as period costs.
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This glossary post was last updated: 27th January 2019.