Variable Costing and Absorption Costing are two different method of presenting the income statement. Each of this two has its own advantages and disadvantages. These two methods are widely use by different companies and called for different names.
Variable Costing is also referred to as direct costing or marginal costing. This is so called direct costing because only the direct cost is added to the product cost. Meaning, when we compute for the unit cost of a product, we only add the direct cost which includes the Direct Materials, Direct Labor and the Variable Manufacturing Overhead Cost. This method is used by management for decision making purposes.
Absorption Costing, on the other hand, is also called the traditional costing. Product cost is computed by adding the cost of Direct Material, Direct Labor, Variable Manufacturing Overhead and Fixed Manufacturing Overhead. Unlike the variable costing method, the information provided by absorption costing is used by both internal and external parties.
Difference of Variable and Absorption Costing
As to the treatment of cost, the only difference is with the Fixed Manufacturing Overhead Cost. In variable costing, it is treated as Period cost while in absorption costing, it is a Product Cost.
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