Absorbed in Business 2025: Meaning, Mechanisms & Real-World Examples

What Does 'Absorbed' Mean in Business?

In the business world, absorbed refers to the act of taking in, acquiring, or shouldering costs or responsibilities. This term applies across various scenarios, including manufacturing overhead allocation, cost increases absorbed by companies, share uptake during IPOs, and corporate mergers and acquisitions.

Key Insights

• Absorbed indicates something taken on internally, such as increased expenses or acquired shares.
• Commonly used in manufacturing to describe overhead costs allocated to goods or services.
• Also describes situations like underwriters absorbing unsold IPO shares or companies being absorbed in mergers.

How Absorbed Works in Business Contexts

Primarily, absorbed costs refer to overhead expenses allocated to products or cost objects—these might include projects, departments, or services. Overhead costs are indirect expenses like utilities or rent, distributed based on predetermined rates. When these costs are assigned, they are considered absorbed.

Sometimes, companies experience over-absorption or under-absorption, where allocated overhead differs from actual costs. Adjustments are made to align financial records accurately.

Absorbing a price increase means a company chooses to bear higher input costs rather than increasing prices for customers. This strategic decision often aims to sustain customer loyalty and remain competitive, even if it reduces profit margins.

Practical Examples of Absorbed Costs

Imagine a peanut butter manufacturer facing a jump in peanut costs from $0.50 to $1.00 per jar. Instead of raising the retail price from $3.00 to $3.50, the company absorbs the extra cost, maintaining price stability but lowering its profit per jar.

In IPOs, underwriters may absorb unsold shares, meaning they purchase and hold these shares themselves. Similarly, in mergers and acquisitions, the acquired company is absorbed into the acquiring entity once the deal finalizes and integration completes.

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