Absorption Costing and Marginal Costing Compared

Absorption costing, which we discussed in Chapter 7, is a technique which charges fixed costs to products or cost units. The fixed overheads are either allocated or apportioned to cost centres. An overhead absorption rate is then used to charge the production cost centre costs to the cost units passing through them. Although the process is arbitrary, the result is that a cost unit is charged with what is deemed to be a fair share of the fixed overhead.