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Absorption and Variable Costing

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Chloe Anne
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9 views2 pages

Absorption and Variable Costing

Uploaded by

Chloe Anne
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Absorption and Variable Costing

Absorption or Full Costing


- All manufacturing costs are
charged to and absorbed by
the product
- Fixed manufacturing
overhead costs are
recognized as product cost
- External reporting
- Follows traditional format in
computing income
o Sales – COGS = GP –
Exp = NI

Variable or Direct Costing


- Only direct materials, direct
labor, and variable
manufacturing overhead costs
are considered product costs
- Fixed manufacturing
overhead costs are
recognized as period costs
when incurred
- Internal reporting
- Follows contribution margin
format
o Sales – VC = CM – FC =
NI Summary of Income Effects
• Produced = Sold = NI of AC =
NI of VC
• Produced > Sold = NI of AC >
Note: If the question is Contribution NI of VC
Margin, selling and administration • Produced < Sold = NI of AC <
expenses are included in the NI of VC
variable costs. However, if the
Rationale
question is only the Variable Costs,
sg&a expenses are not included. • The rational for variable
costing focuses on the
purpose of fixed
manufacturing costs, which is
to have productive facilities
available for use.
• Defenders of absorption
costing justify the assignment
of fixed manufacturing
overhead costs to inventory on
the basis that these costs are
as much a cost of getting a
product ready for sale as
direct materials or direct labor.
• The use of variable costing
in product costing is
acceptable only for internal
use by management.

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