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absorption costing versus variable costing

What are the differences between Absorption Costing Versus Variable Costing? Give an explanation and a complete example.

Solution Preview

These two costing methods apply to manufacturers who are making a product and need to compute the cost for each unit in order to record the cost in inventory.

Absorption costing, which is required by GAAP reporting, includes fixed costs in the cost per unit that is recorded in inventory. Variable costing only includes the variable costs in the cost per unit that is recorded in inventory. Variable costing, instead of spreading the fixed costs to the units produced, puts the full fixed costs of production in the income statement as a period expense.

Here is an example:
.................................................................per unit
Direct ...

Solution Summary

Your response is 260 words and explains which firms need to understand these two methods, which GAAP requires, how the methods differ and gives examples of how costs would be handled in each method. An exhibit is shown to make it easy to "see." Response is in everyday language suitable for novices.

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