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In full absorption costing, fixed manufacturing overhead is included in the cost of the product. In variable costing, fixed manufacturing overhead is expensed.
What is absorption costing and variable costing?
- Absorption costing and variable costing are two popular methods of accounting that companies use to determine the value of their inventories and analyze their finances. If you want to assess the value of a company's inventory, it's important to understand these different accounting practices. In this article, we discuss what absorption costing is, what variable costing is and list the major differences between the two accounting methods.
- Absorption costing and variable costing treat fixed overhead costs differently. Absorption costing allocates fixed overhead costs across all units produced for the period. Variable costing, on the other hand, adds all fixed overhead costs together and reports the expense as one line item separate from the cost of goods sold or still available for sale. In other words, variable costing will yield one lump-sum expense line item for fixed overhead costs when calculating net income, while absorption costing will result in two categories of fixed overhead costs: those attributable to the cost of goods sold, and those attributable to inventory.
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