Absorption costing means that all the manufacturing costs are absorbed by the total units produced. In short, the cost of a finished unit in inventory will include direct materials, direct labor, and both variable and fixed manufacturing overhead. As a result, absorption costing is also referred to as full costing or the full absorption method. Absorption costing is often contrasted with variable costing or direct costing. Under variable or direct costing, the fixed manufacturing overhead costs are not allocated to the products manufactured. Variable costing is often useful for management’s decision-making. However, absorption costing is required for external financial reporting and for income tax reporting. It is also referred to as the full- cost technique
The high low method is the method of segregating semi-variable cost which is based on the analysis of the past records of expenses. This method takes into account only the highest and the lowest values contained in the data in order to determine the rate of cost change and thereafter variable cost. The variable cost is then deducted from the total cost to get the fixed cost.
Variable cost is the cost which, in aggregate, tend to vary in direct proportion to changes in volume of output or turnover.
Fixed cost is the cost which accrue in relation to passage of time and which within certain output or turnover limit (relevant range), tend to be unaffected by fluctuations in the level of activity, that is output or turnover.