Absorption costing (also called “full costing”) is the method derived from the application of the Fundamental Accounting Principles. This method was derived from the system developed in Germany in the early 20th century known as RKW  (Reichskuratorium für Wirtschaftlichtkeit). It consists in the appropriation of all costs (direct and indirect, fixed and variable) caused by the use of production resources to the elaborated goods, and only those of production, this within the internal operational cycle. All expenses related to the manufacturing effort are distributed to all products made.


Assuming the following costs for producing XYZ, using the absorption system method, we have:

Raw materials transferred to production                                       25,000.00
Cost of Production Labor calculated in the month                                       10,000.00
General Production Expenses calculated in the month                                         8,000.00
TOTAL MONTHLY PRODUCTION COST                                       43,000.00
Units Produced in the month                                              5,000
Unit Cost of XYZ Production                                                8.60

The main characteristics of absorption costing:

  1. Includes total costs: fixed, variable, direct and / or indirect.
  2. Needs apportionment criteria, in case of appropriation of indirect costs (general production expenses) when there are two or more products or services.
  3. It is the legal criterion required in Brazil.However, it is not always useful as a cost management (analysis) tool, as it allows distortions when distributing costs between different products and services, making it possible to mask waste and other productive inefficiencies.
  4. The results presented are directly influenced by the production volume.


The cost of acquiring goods intended for resale will include those for transportation and insurance until the taxpayer’s establishment and the non-recoverable taxes due on the acquisition or import (RIR / 1999, art. 289 and its §§).

The cost of producing the goods or services will necessarily include (RIR / 1999, art. 290):

  • the cost of purchasing raw materials and any other goods or services applied or consumed in production, including transportation and insurance until the taxpayer establishes and the non-recoverable taxes due on the acquisition or import;
  • the cost of personnel employed in production, including direct supervision, maintenance and custody of production facilities;
    • rental, maintenance and repair costs and depreciation charges for goods used in production;
    • amortization charges, directly related to production;
    • the costs of depleting the natural resources used in production.


    The acquisition of eventual consumer goods whose value does not exceed 5% of the total cost of products sold in the previous calculation period may be recorded directly as a cost (RIR / 1999, art. 290, sole paragraph).

    According to the PN CST n the  70/1979, consider themselves as possible consumption of that good applicable in industrial activities or in the service sector occasionally irregularly.


    Reasonable losses and breaks are considered to be part of the cost, according to the nature of the asset and the activity, occurring in manufacturing, transportation and handling, as well as breaks and losses of stock due to deterioration, obsolescence or the occurrence of risks not covered by insurance, provided that they are proven by reports or certificates issued by a competent authority (health authority, fire department, tax authority, etc.) that identify the quantities destroyed or rendered useless and the reasons for the action.

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