Question

how are absorption costing and variable costing the same?How are they different?

Answer 1

1.The basic difference between absorption and variable costing relates to the heading of fixed manufacturing overhead. Under absorption costing, fixed manufacturing overhead is treated as a product cost and hence is an asset until products are sold. Under variable costing, fixed manufacturing overhead is treated as a period cost and is deducted in full from the current period’s revenues.

2.Selling and administrative expenses treated as period costs under variable costing, the same as under absorption costing

3.Under absorption costing, as a company manufacturing units of product, the fixed manufacturing overhead costs of the period are added to the units, along with direct materials, direct labor, and variable manufacturing overhead. If some of these units are not sold by the end of the period, then they are carried into the next period as inventory. The fixed manufacturing overhead cost attached to the units in ending inventory follow the units into the next period as part of their inventory cost. When the unit carried over as inventory are finally sold, the fixed manufacturing overhead cost that has been carried over with the units is included as part of that period’s cost of goods sold.

4.Many accountants and managers believe absorption costing does a better job of matching costs with revenues than variable costing. They argue that all manufacturing costs must be assigned to products to properly match the costs of producing units of product with the revenues from the units when they are sold. They believe that the fixed costs of depreciation, taxes, insurance, supervisory salaries, and so on, are Justas essential to manufacturing products as are the variable costs.

5.

• Absorption costing differs from variable costing because it allocates fixed overhead costs to each unit of a product produced in the period.
• Absorption costing allocates fixed overhead costs to a product whether or not it was sold in the period.
• This type of costing means that more cost is included in the ending inventory, which is carried over into the next period as an asset on the balance sheet.

6.variable cost is a corporate expense that changes in proportion to production output. Variable costs increase or decrease depending on a company's production volume; they rise as production increases and fall as production decreases. Examples of variable costs include the costs of raw materials and packaging.