Absorption pricing is the particular process of setting the prices where the price possesses the variable costs as well as the proportionate fixed costs. Here, the fixed costs are being absorbed within the prices of the products as each of the products reflects the variable costs as well as the relevant share of the fixed cost. This concept is the modification form of full cost plus pricing where the full cost is being charged to a product, but the profit is not considered as one of the factors.
Calculation of Absorption Pricing
The absorption pricing of the individual units can be divided separately to the administrative costs and the total overhead costs by the total number of units produced and then adding the result with the variable cost per unit. The formula can be explained as:
Variable Cost/Unit + (Total Overhead + Administrative expense )
Number Of Units Produced
The additional markup of the profit can also be added with the formula according to the discretion of the specific company.
The pricing method is generally used to calculate the long term price of the product for paying all the expenses. The process definitely ensures that the business maintains profitability for the long term.