Absorbed Cost Explained

Absorbed cost in a business can be defined as the indirect cost related to the manufacturing of products of the business. In order to understand absorbed cost let take an example of a building where overall manufacturing process of the business is going on. The tax that a business has to pay for that building, the insurance being paid for the security of the building or the rent paid for that building in case building is not owned by the business itself is including in absorbed cost. Absorbed costs are not included during the determination of the total costs of manufacturing instead all these costs are maintained in a separate account.

In further explanation this must be noted that while recording in the income statement the cost of goods sold don’t display or reflect the absorbed cost involved in manufacturing. In income sheet the costs of goods sold entry only include the costs of material directly involved in manufacturing. Instead of being shown in cost of goods sold entry absorbed costs are projected as separate expenses.

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