What does absorption costing include?

Absorption costing is a method that captures all manufacturing costs associated with a product. This includes not only the variable costs, such as direct materials and direct labor, but also the fixed manufacturing costs. Fixed manufacturing costs can comprise expenses like salaries of production supervisors, rent for manufacturing facilities, and depreciation on manufacturing equipment.

By including both fixed and variable costs, absorption costing provides a comprehensive view of product cost, which is vital for pricing, profitability analysis, and inventory valuation. This approach ensures that all costs incurred to produce a product are allocated to it, which aligns financial reporting with the actual resources consumed in the manufacturing process. This method also influences managerial decision-making regarding production levels, pricing strategies, and budgeting.

In contrast, other methods, like variable costing, would only include variable production costs, reflecting a different perspective on how costs behave and how they should impact financial decisions.