Finance: What is Absorption Costing?

What is Absorption Costing? Absorption costing is an accounting method compliant with GAAP that factors all costs related to the manufacture of a product and expenses them individually instead of as a cumulative sum. This method separates inventory overhead from manufacturing overhead to more accurately reflect cost of goods sold.

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Transcript

00:24

bucks to produce Well nice corporate jet there You have

00:26

to ask What do you mean by cost Cost to

00:30

produce What were those costs like Was that just the

00:33

gross cost of the physical parts of the airplane Like

00:36

the engine the fuse lodge the electrical systems controls fuel

00:40

management rich Corinthian leather seats plus labor to assemble them

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Is that what you meant by costs Is that what

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you've included in that eight million dollar figure Or did

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you include all the other crap that needs O R

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Sucks up cash to produce one unit of an airplane

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What about the forty million dollars a year your company

00:57

spends on lobbyist with the FAA being sure that your

01:00

plane gets properly certified and is in fact legally allowed

01:04

to fly You make eighty planes a year so that

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forty million on average is well five hundred grand A

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plane was that five hundred grand included in the eight

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million dollar figure you just quoted Was it absorbed in

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the cost figure What about rent on the building in

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which the plane was assembled For the myriad lawyers who

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you know lawyer stuff or the interest costs on the

01:25

capital you borrowed TIO start the company in the first

01:28

place or the union pension fund cost for the people

01:32

who labor to assemble the plane Was that included Well

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when you start adding up all these other costs on

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an eighty planes a year manufacturing schedule will the plane

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as an individual product then would quote absorb unquote all

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of these other costs exogenous to the unit cost of

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building that one plane And instead of costing eight mil

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well it's fully absorbed Cost might be more like twelve

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thirteen fourteen million bucks Yeah big difference Big plane Big 00:02:01.58 --> [endTime] fuzzy dice