Definition of Absorption
The process by which one substance takes in or assimilates another.
Explanation of Absorption
Absorption, in a business and financial context, refers to the process of incorporating or assimilating something into a larger entity. This term is often used in accounting and economics to describe how costs, resources, or other elements are integrated into an overall system or structure. For example, absorption costing is an accounting method where all manufacturing costs, including fixed and variable costs, are assigned to products. This method ensures that the total cost of production is absorbed by the units produced, providing a comprehensive view of product costs. In economics, absorption can refer to the total demand for goods and services within an economy, including consumption, investment, government spending, and net exports. This concept is essential for understanding economic activity and growth. In the context of mergers and acquisitions, absorption might describe the process by which one company integrates another company into its operations, absorbing its assets, liabilities, and workforce. Understanding absorption is crucial for making informed financial decisions and analyzing economic trends.