rent are the dominant part of the cost of the product. One of the main reasons for absorbing overheads into the cost of is for inventory valuation purposes. Absorption costing is permissible under GAAP. Traditional TAC was developed in the age of manufacturing and mostly used to arrive at the full manufacturing cost of producing goods; an alternative method of arriving at full cost known as activity-based costing (ABC) is often thought to be more appropriate for services. Absorption costing is a means of incorporating a fair share of indirect cost or overheads into the cost of a unit of product or service provided. Absorption costing A costing method that includes all manufacturing costs—direct materials, direct labour, and both overhead—in unit product costs. According to the ICMA London "Absorption costing is a principle whereby fixed as well as variable costs are allocated to cost unit the term may be applied where production costs only or costs of all function are so allocated". See also Variable costing References Accounting terminology Costs