How to Calculate the Cost of Absorption

The cost of absorption (sometimes referred to as "absorption costing") is the statistic for how much money is spent (or "absorbed") on any given product that a business is selling. In other words, it is the total cost to produce and maintain a product. This could mean material cost, cost of labor, cost of storage, cost to sell and a variety of other costs. To make a sales profit, the income generated must surpass this cost of absorption.

Things You'll Need

  • Calculator

Instructions

    • 1

      Determine the cost of the direct materials used to create the product. If a product is composed of plastic, screws and glue, this means the amount it costs for that plastic, those screws and the glue. In other words, all raw materials that are needed for the physical final product.

    • 2

      Determine the cost of the labor used to create the product. This mean both the labor costs of the people who originally designed the product (for example, the salary of architect who designed the first grocery store) and then the cost of the people who are continually producing the product (for example, the grocery store builders who use the architect's original design).

    • 3

      Determine the variable and fixed manufacturing overhead needed to produce the product. For example, this would account for such things as the machinery needed to build the product (fixed overhead) and the electricity needed to operate the machine (variable overhead).

    • 4

      Add all of these numbers together. This is the cost of absorption for your product. If you want to calculate the cost of absorption over a period of time or for an amount of products being created (for example, for every 1000 pieces of product that are created), simply divide this number by the amount of days, months or years when the product is being made, or by the amount of pieces being produced.

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References

  • Photo Credit business image by peter Hires Images from Fotolia.com

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