QS Study

Differentiate between Absorption and Variable Costing

Absorption Costing means that all of the manufacturing costs are absorbed by the units produced. In other words, the cost of a finished unit in inventory will include direct materials, direct labor, and both variable and fixed manufacturing overhead. Variable Costing is a managerial accounting cost concept. Under this method, manufacturing overhead is incurred in the period that a product is produced. The differences between absorption costing and variable/direct costing are as follows –

Absorption costing

  • Absorption, the cost is the practice of charging all costs, both fixed and variable to operations, process, or products.
  • Fixed manufacturing overhead is treated as a product cost and is an asset until products are sold.
  • It includes direct materials, direct labor and both variable and fixed manufacturing overhead in the cost of a unit of product.
  • Under the full costing method, fixed manufacturing overhead costs are expensed when the product is sold.

Variable/direct costing

  • In variable costing, only manufacturing costs are assigned to units cost.
  • Fixed manufacturing overhead is treated as a period cost and is deducted in full from the current period’s revenue.
  • It includes direct materials, direct labor and variable manufacturing overhead in the cost of a unit of product.
  • Under the direct costing method, fixed manufacturing overhead costs are expensed during the period in which they are incurred.