Business Analysis with Microsoft® Excel, Second Edition

Using Absorption and Contribution Costing

Two important methods of determining costs are absorption and contribution costing. Although they can yield very different results, there is only one major difference between the two approaches: absorption costing allocates certain production costs between the total cost of goods sold and the ending inventory, while contribution costing allocates those production costs entirely to the cost of goods sold.

The result is that the income for a period can differ depending on which method is used. The specific reasons are discussed in the two sections that follow.

Understanding Absorption Costing

A problem in determining profitability arises when, at the end of a period, you have some quantity of goods that ...