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Variable and absorption costing comparison

Variable and absorption costing are two cost methods. Compare and contrast these two methods, including the implications of using either method. Include at least one example to support your comparison.

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a) Absorption costing and marginal costing are methods of determining product cost. In what ways do these methods differ in their treatment of overheads.

In product/service costing, an absorption costing system apportions a share of all costs incurred by a business to each of its products/services. In this way, it can be established whether, in the long run, each product/service makes a profit. Thus under absorption costing, all normal manufacturing costs are considered product costs and included in inventory. As sales occur, the cost of inventory is transferred to cost of goods sold; meaning that the gross profit (sales minus cost of goods sold) is reduced by all costs of manufacturing, whether those costs relate to direct materials, direct labor, variable manufacturing overhead, or fixed manufacturing overhead.

Using an absorption costing system, the profit reported for a manufacturing business for a period will be influenced by ...

Solution Summary

The solution compares and contrasts the two methods.