Absorption & Marginal Costing

Overheads (indirect costs) cannot be traced to one unit, so they must be shared out. Absorption costing charges every unit with a fair share of overheads; marginal costing charges only variable costs to units.

Allocation, apportionment, absorption

Allocation — a whole overhead belongs to one cost centre (e.g. a department's own supervisor).
Apportionment — a shared overhead is split between centres on a fair basis (e.g. rent by floor area, lighting by area).
Reapportionment — service-centre costs (e.g. stores) are shared to production centres.
Absorption — production-centre overheads are charged to units using an overhead absorption rate (OAR).