Definition of 'Absorption Costing'

A managerial accounting cost method of expensing all costs associated with manufacturing a
particular product. Absorption costing uses the total direct costs and overhead costs associated
with manufacturing a product as the cost base. Generally accepted accounting principles (GAAP)
require absorption costing for external reporting.
Absorption costing is also known as "full absorption costing".

Investopedia explains 'Absorption Costing'

Some of the direct costs associated with manufacturing a product include wages for workers
physically manufacturing a product, the raw materials used in producing a product, and all of the
overhead costs, such as all utility costs, used in producing a good.
Absorption costing includes anything that is a direct cost in producing a good as the cost base.
This is contrasted with variable costing, in which fixed manufacturing costs are not absorbed by
the product. Advocates promote absorption costing because fixed manufacturing costs provide
future benefits

Semi-variable cost is an expense which contains both a fixed-cost component and a variablecost component. The fixed cost element shall be a part of the cost that needs to be paid
irrespective of the level of activity achieved by the entity. On the other hand the variable
component of the cost is payable proportionate to the level of activity.
It shows similarities to telephone bills. One must pay line rental and on top of that a price that
depends on how heavy one is using the service. So it changes with output. Another example
is satellite television. A price for the box must be paid monthly and to get additional movies,
more money has to be given.
Cost of energy, such as electricity, is a good example as it is integral to production of goods
and services. This component straddles both the fixed and variable universe because electrical
power is essential for the basic operation of the business in lighting and heating this portion
is a sunk cost that is foregone regardless of production. As demand ramps up, more energy is
required to ramp up the production process in the use of machinery or large banks of
computers for instance. Cost of electrical energy will then rise accordingly as production
activities increase. Therefore, the cost of electricity can be viewed as semi-variable.

Take the highest output and costs. Take the lowest output and costs. Take one from the other
= movement in cost per unit Calculate variable cost per unit Put back into highest total cost
and rework variable cost to the output, leaving fixed cost.

General form of semi-variable cost[edit]

The relationship between mixed cost and level of activity can be expressed by the following
equation.
Y = a + bX
In this equation,
*
*
*
*

Y
a
b
X

=
=
=
=

The
The
The
The

total mixed cost

total fixed cost
variable cost per unit
level of activity

The equation makes it very easy to calculate what the total mixed cost or an unknown
factor(fixed cost/variable cost/level of activity)