method in which all manufacturing costs, variable and fixed, are treated as PRODUCT COSTS, while nonmanufacturing costs (e.g., selling and administrative expenses) are treated as PERIOD COSTS. Absorption costing for inventory valuation is required for external reporting. See also DIRECT COSTING.A comparison between absorption and direct costing follows:

Absorption Costing

1. Required for outside reporting
2. Includes fixed overhead as an inventoriable cost
3. Stresses gross profit
4. Has a higher net income when production exceeds sales

Direct Costing

1. Not accepted for outside reporting
2. Does not include fixed overhead as an inventoriable cost
3. Stresses contribution margin
4. Has a higher net income when sales exceed production

1. a form of costing for a product that includes both the direct costs of production and the indirect overhead costs
as well 2. an accounting practice in which fixed and variable costs of production are absorbed by different cost centres. Providing all the products or services can be sold at a price that covers the allocated costs, this method ensures that both fixed and variable costs are recovered in full.