The practice of charging all costs, both variable and fixed, to operations, products or processes is called absorption costing.

As a costing system, absorption costing treats all costs of production as product costs, regardless of whether they are variable or fixed. Under the absorption costing method, a unit of product costs:

• Direct materials, plus
• Direct labor, plus
• Variable overhead, plus
• A proportion of fixed overhead.

Absorption costing is the process of determining the cost of goods sold based on the full cost of all inputs that are used to produce those goods. This type of costing is also referred to as full absorption costing or full-cost pricing.