DEFINITION of ‘Absorbed Cost’
The indirect costs that are associated with manufacturing. Absorbed costs include such expenses as insurance, or property taxes for the building in which the manufacturing process occurs. When the total manufacturing costs are determined, the implicit absorbed costs are not considered, but will be included in a separate account.
BREAKING DOWN ‘Absorbed Cost’
On a company’s income statement, the cost of goods sold entry does not reflect the absorbed costs; only the actual costs of the material is included. Incurring insurance and property tax expenses is a required part of the manufacturing process, but these absorbed costs are classified as separate expenses.