absorption costing

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The cost accounting system in which the overheads of an organization are charged to the production by means of the process of absorption. Costs are first apportioned to cost centres, where they are absorbed using absorption rates. Although this method has the advantage of simplicity, it involves an essentially arbitrary allocation of costs; for this reason the system of activity-based costing is now widely preferred. Compare marginal costing.

Subjects: Accounting.

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