ABSORBED COSTS Meaning and
Definition
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Absorbed costs refer to the expenses incurred by a company that are included in the cost of producing goods or services. These costs are absorbed or allocated to the cost of goods sold or the cost of a particular project, rather than being expensed immediately. Absorbed costs are typically associated with manufacturing or production-related activities and are used to determine the total cost of producing a product.
There are different types of absorbed costs, including direct materials, direct labor, and factory overhead costs. Direct materials costs include the cost of raw materials needed to manufacture a product, while direct labor costs refer to the wages or salaries paid to workers involved in the production process. Factory overhead costs encompass other expenses necessary to operate the manufacturing facility, such as rent, utilities, machinery maintenance, and depreciation.
Absorbed costs are important because they determine the total cost of producing a product, which is essential for pricing decisions, budgeting, and forecasting. By absorbing these costs into the production process, companies can accurately calculate the cost per unit and make informed decisions regarding pricing strategies and profit margins.
It is worth noting that absorbed costs differ from variable costs, which vary in relation to changes in production volume. Although variable costs are expenses directly associated with the production process, absorbed costs include both variable and fixed costs that are necessary for production. Therefore, absorbed costs provide a more comprehensive picture of the total expenses incurred by a company in its manufacturing activities.
Etymology of ABSORBED COSTS
The word "absorbed costs" is composed of two parts: "absorbed" and "costs".
The term "absorbed" is derived from the verb "absorb", which comes from the Latin word "absorbere". "Absorbere" is a compound of the prefix "ab-" meaning "away" or "off" and "sorbere" meaning "to suck in". Therefore, "absorb" originally meant "to suck in or drink up", but its meaning has evolved to include concepts of assimilation or integration.
The term "costs" comes from the Old French word "coste", meaning "expense" or "outlay". It originated from the Latin word "constare" which meant "to stand together" or "to be complete".
