Absorption costing is also known as ‘full costing’. This method calculates the cost of the production of one unit of a product by allocating the variable costs and a portion of the fixed costs.  

Absorption cost = direct costs + share of indirect costs

Smilers is a toothbrush manufacturer in the UK. The cost of raw materials is £0.30 per brush and labour is £0.20 per brush. The monthly rent on the factory is £25,000 and other utilities are £7,000. They produce 100,000 brushes per month. Using the absorption costing method, the total cost of one toothbrush is calculated below

Raw materials = £0.30

Labour = £0.20

Rent =  £25,000 ÷ 100,000 = £0.25

Other utilities = £7,000 ÷ 100,000 = £0.07

Total absorption cost = £0.82

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