What Is Absorption Drift in Manufacturing Cost Systems?
Manufacturers rely on absorption costing to allocate overhead across production. In theory, this creates consistent product costing and stable margins. In reality, production environments evolve while absorption assumptions often remain unchanged. Absorption drift occurs when the relationship between overhead allocation and actual production behavior becomes misaligned. As production volumes, labor mix, and automation levels change, […]
What Is Contribution Illusion in Manufacturing Cost Systems?
Contribution illusion occurs when a product, customer, or division appears profitable under existing cost allocation mechanics but becomes significantly less profitable once overhead drivers are aligned with actual operational behavior. This distortion typically develops when overhead allocation methods fail to reflect how production resources are truly consumed. The accounting system continues producing accurate financial statements, […]
Absorption Drift: The Silent Killer of Accurate Margins
Your overhead allocation was set up correctly once. But volumes change, mix shifts, and the math stops matching reality.