In total absorption costing, which costs are included?

In total absorption costing, both fixed and variable costs are included in the cost of a product. This method of costing ensures that all manufacturing costs are allocated to products, providing a comprehensive view of product costs.

By encompassing direct materials, direct labor, variable manufacturing overhead, and fixed manufacturing overhead, total absorption costing reflects the full cost incurred to produce each unit. This approach is particularly important for financial reporting, as it adheres to accounting standards that require all manufacturing costs to be matched with revenues in the income statement. This comprehensive treatment helps in better understanding profitability and aids in pricing decisions as well.

Using only variable costs or only fixed costs would provide an incomplete picture of the total cost of production, leading to skewed profitability assessments. Similarly, excluding certain elements like direct materials would ignore essential costs, thus failing to represent a true up-to-date cost of goods sold.