In accounting, net income represents a company’s financial performance over a given period, calculated by subtracting expenses from revenues. Absorption costing is a method that assigns manufacturing costs, both fixed and variable, to the units produced in a period. Calculating net income under absorption costing involves determining the total cost of goods sold, which includes not only direct material and labor costs but also manufacturing overhead costs.
Absorption costing provides a more accurate picture of product costs and profitability, particularly in industries with significant fixed manufacturing costs. It allows companies to track the full cost of production, including those costs that may not be directly related to the units produced in a given period.