Product Costing: Absorption Costing

This chapter looks at the different categories of costs incurred by organizations and the ways in which the cost of products and services can be determined. It begins by illustrating the importance of costs in making business decisions. It then provides the definitions of the terms ‘direct costs’, ‘indirect costs’, ‘fixed costs’, and ‘variable costs’. In addition, the chapter shows how to construct simple costing statements to determine the total cost of products on an absorption (full) costing basis and how to draw simple graphs to illustrate fixed, variable, and total cost behaviour in a business context. The chapter likewise considers the limitations of absorption costing approaches in allocating overheads to products and the assumptions on which costing is based.