Differentiate between Absorption and Variable Costing

Differentiate between Absorption and Variable Costing

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.

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