Difference Between Variable Costing And Absorption Costing

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In this paper we extend the costing approaches and the two different approaches which include Variable costing and Absorption costing. This paper explains the difference between variable costing and absorption costing. All successful companies around the world use a strategic business plan that leads to a tactical plan and an operation plan which lead to the execution; both of the costing approaches, variable and absorption costing, to help their business flourish. Variable costing and absorption costing are not to be substituted for one another since both the approaches have their own benefits and limitations to any unique situation. In this document we will discuss the different approaches variable and absorption costing uses, the…show more content…
Income reporting is one major difference between these two costing approaches. Using absorption versus variable costing for the finished product will have different effects on profit margins as reported on the income statement. Absorption costing does not support CVP analysis because it essentially treats fixed manufacturing overhear as a variable cost by assigning a per unit amount of the fixed overhead to each unit production. Treating fixed manufacturing overhear as a variable cost can, lead to faulty pricing decisions and keep-or-drop decisions, and produce positive net operating income even when the number of units sold is less than the breakeven point. However, under the process described earlier, variable costing reports lower net income. Companies using the absorption method will not incur lower net revenue until they sell goods, which move the costs from inventory to cost of goods sold (Pong). Fixed expenditures are not figured in the cost of goods sold under the variable method, therefore the inventory is carried at a lesser value than the full absorption method. Even though a company uses absorption costing for financial reporting, it is not prevented from reporting internally for management purposes under a variable costing method. The difference is that variable costing is often considered to be an enhanced way for management to regulate financial manufacturing decisions. The variable costing approach would be much more appropriate for
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