What does Full Absorption Costing allocate?

Full absorption costing allocates all manufacturing and non-manufacturing costs to the cost of a product. This method encompasses not only direct costs, which include direct materials and direct labor, but also all indirect costs associated with manufacturing production, such as manufacturing overhead. By including all costs that are incurred in the production process, this approach provides a comprehensive view of a product's total cost.

Moreover, full absorption costing also allows for the inclusion of non-manufacturing costs that are associated with the selling, general, and administrative expenses up to a certain point, although typically it is primarily considered in the context of manufacturing costs. This method is crucial for financial reporting and can affect profit calculation, inventory valuation, and management decisions regarding pricing and budgeting.

In comparison to other options, the focus on only manufacturing costs would not give a complete picture of the total cost incurred in producing goods, while only considering direct costs would ignore the significant expenses that are indirectly related to production. Likewise, restricting the allocation to corporate overhead costs would not account for all the necessary expenses incurred during the manufacturing process, leading to incomplete financial assessments.