Difference Between Absorption & Variable Costing

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Difference between Variable & Absorption Costing

When it comes to managerial accounting, the way that information is presented can affect decision-making for a business. In a manufacturing environment, companies can use absorption costing or variable costing when accounting for the costs of products produced. While these methods are similar, they have some key differences that can impact the company.

Absorption Costing * Absorption costing, also known as full costing is a method by which all of the expenses associated with producing a product are included in its cost. With absorption costing, you include both the fixed and variable expenses in each individual unit. When the units are priced, any profit margin is added on top
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However, without including the fixed costs, it can be difficult to make decisions based on variable costing data, since all of the information is not provided.

Companies apply different costing techniques to keep track of the production of goods and services. Both absorption and costing techniques allow companies to obtain a complete picture of their financial standing. The application of these two methods allows the company to see everything from taxes and sales to inventories in manufactured goods to the cost of all expenses within the organization. In other words, both absorption and variable costing techniques give companies a more accurate picture of how the company has performed financially.

Absorption Costing * Absorption costing is also called full costing or the full absorption method. In absorption costing the company absorbs all of the manufacturing costs by the products produced. This means the price of every piece of finished inventory will include direct labor, direct materials and variable and fixed manufacturing overhead. Some of these costs include wages for workers to produce the product, materials used in producing a product and overhead costs. Absorption costing is also used for external financial reporting and income tax reporting.
Advantage and Disadvantage of Absorption Costing * The advantage of using absorption
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