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Cost.: Absorption Costing Variable Costing

Absorption costing and variable costing are two product costing methods. Absorption costing includes all manufacturing costs, including fixed overhead, in the cost of a unit. Variable costing only includes variable costs. Fixed overhead is treated as a period cost under variable costing but as a product cost under absorption costing. The net income reported can differ between the two methods depending on whether production equals, exceeds, or is less than sales in a period.

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71 views

Cost.: Absorption Costing Variable Costing

Absorption costing and variable costing are two product costing methods. Absorption costing includes all manufacturing costs, including fixed overhead, in the cost of a unit. Variable costing only includes variable costs. Fixed overhead is treated as a period cost under variable costing but as a product cost under absorption costing. The net income reported can differ between the two methods depending on whether production equals, exceeds, or is less than sales in a period.

Uploaded by

Angeline Ramirez
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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ABSORPTION COSTING OR FULL COSTING

- a product costing method that includes all the manufacturing costs (direct materials, and
both the variable and fixed factory overhead) in the cost of a unit of product.

 Under the absorption costing method, fixed factory overhead is treated as a product
cost.

VARIABLE COSTING

- a product costing method that includes only the variable manufacturing costs (direct
materials, direct labor, and variable overhead) in the cost of a unit of product.

 Under the variable costing method, fixed factory overhead is treated as a period
cost.

PRODUCT COST COMPONENTS

Absorption Costing Variable Costing

Direct materials Direct materials


+ Direct labor + Direct labor
+ Variable FOH + Variable FOH
+ Fixed FOH -
Product Cost Product Cost

DISTINCTIONS BETWEEN PERIOD COSTS AND PRODUCT COSTS

PERIOD COST PRODUCT COST


1. Cost that is charged against
1. Cost that is included in the
current revenue during a
computation of product cost
time period regardless of the
that is apportioned between
difference between
the sold and unsold units.
production sales volumes.
2. An inventoriable cost. The
2. Does not form part of the portion of the cost that has been
cost of inventory. allocated to the unsold units
becomes part of the cost of inventory.

3. Reduces current income by


the portion allocated to the sold units;
3. Reduces income for the
the portion allocated to unsold units
current period by its full amount
is treated as an asset, being part of
the cost of inventory.

PRINCIPAL DIFFERENCES BETWEEN ABSORPTION AND VARIABLRE


COSTING METHODS

ABSORPTION COSTING VARIABLE COSTING

1.Cost Seldom segregates costs Costs are segregated into


Segregation into variable and fixed cost variable and fixed

Cost of inventory includes Cost of inventory includes


all the manufacturing costs: only the variable
2. Cost of
materials, labor, variable manufacturing costs:
Inventory
factory overhead, and fixed materials, labor, and
factory overhead variable factory overhead

3. Treatment of
Fixed factory overhead is Fixed factory overhead is
fixed factory
treated as product cost. treated as period cost.
overhead

Distinguish between Distinguishes between


4. Income production and other costs variable and fixed costs
statement
S xx S xx
- CGS (product cost) xx - VC xx
DIFFERENCE IN NET INCOME ABSORPTION AND VARIABLE COSTING

Variable and absorption costing methods of accounting for fixed manufacturing overhead result
in different levels of net income in most cases. The differences are timing differences, i.e., when
to recognize the fixed manufacturing overhead as an expense. In variable costing, it is
expensed during the period when the fixed overhead is incurred, while in absorption costing, it is
expensed in the period when the units to which such fixed overhead has been related are sold.

PRODUCTION EQUALS SALES:

When production is equal to sales, there is no change in inventory. Fixed overhead expensed
under absorption costing equals fixed overhead expensed under variable costing. Therefore,
absorption costing income equals variable costing income.

PRODUCTION IS GREATER THAN SALES

When production is greater than sales, there is an increase in inventory. Fixed overhead
expensed under absorption costing is less than fixed overhead expensed under variable
costing. Therefore, absorption income is greater than variable costing income.

PRODUCTION IS LESS THAN SALES

When production is less than sales, there is a decrease in inventory. Fixed overhead expensed
under absorption is greater than fixed overhead expensed under variable costing. Therefore,
absorption income is less than variable costing income.

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