Absorption costing is a costing method where all production costs are included in the cost of a product.

It includes:

Direct materials

Direct labour

Direct expenses

Factory overheads (both fixed and variable)

Under this method, even fixed manufacturing overhead is absorbed into the cost of units produced.

It is also known as full costing and is commonly used for financial reporting.

In simple terms, absorption costing means adding both direct and indirect production costs to find the total cost of a product.