Variable costing and absorption costing
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What are the differences between absorption and variable costing methods on income statement presentation?
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This explains the difference between variable costing and absorption costing
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ABSORPTION COSTING:
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 the level of production as well as by the level of sales. This is because of the absorption of fixed manufacturing overheads ...
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