ECONOMICS

Detailed explanation-1: -Absorption costing, sometimes called “full costing, ” is a managerial accounting method for capturing all costs associated with manufacturing a particular product. All direct and indirect costs, such as direct materials, direct labor, rent, and insurance, are accounted for when using this method.

Detailed explanation-2: -Only the variable cost is applied to inventory under marginal costing, while fixed overhead costs are also applied under absorption costing. Profitability. The profitability of each individual sale will appear to be higher under marginal costing, while profitability will appear to be lower under absorption costing.

Detailed explanation-3: -Using the absorption costing method will increase COGS and thus decrease gross profit per unit produced. This means companies will have a higher breakeven price on production per unit. It also means that customers will pay a slightly higher retail price.

Detailed explanation-4: -Absorption costing can skew a company’s profit level due to the fact that all fixed costs are not subtracted from revenue unless the products are sold. By allocating fixed costs into the cost of producing a product, the costs can be hidden from a company’s income statement in inventory.