Concept explainers
Briefly explain the difference between absorption costing and variable costing.
State the difference between absorption costing and variable costing.
Explanation of Solution
Absorption Costing: “Absorption costing is a method that allocates “direct labor, direct materials, fixed manufacturing overhead and variable manufacturing overhead” to products and it is required by GAAP for the purpose of external reporting”.
Variable Costing: Managers frequently use variable costing for internal purposes for taking decision making. The cost of goods manufactured includes direct materials, direct labor, and variable factory overhead. Fixed factory overhead treated as period (fixed) expense.
State the difference between absorption costing and variable costing as follows:
- Under absorption costing, the products costs are the cost that are assigned to the units of product as fixed manufacturing-overhead costs.
- Under variable costing, the products costs are not assigned to the units of product as fixed manufacturing-overhead costs, instead it is treated as a period costs and expensed during the period in which it is incurred.
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