Question

How does product costing used in financial accounting differ from product costing used in managerial accounting?

Answer 1

· Product Costing used in Financial accounting is conceptually known as “Absorption Costing method”.

· Product Costing used in Managerial accounting is conceptually known as “Variable costing method”.

· Product Cost differs under Absorption method and Variable costing method.

· Certain differences are provided below:

Variable Costing:

Product Cost under Variable costing includes direct material cost, direct labor cost, and variable manufacturing overhead only.

Fixed manufacturing overhead do not form part of the Product cost.

Absorption Costing:

Product Cost under Absorption costing includes direct material cost, direct labor cost, variable manufacturing overhead AND fixed manufacturing overheads.

>Selling, General and administrative expenses (BOTH Variable and Fixed) DO NOT FORM part of product cost.

Product Cost
Absorption Costing	Variable Costing
Direct material	Direct material
Direct Labor	Direct Labor
Variable manufacturing overhead	Variable manufacturing overhead
Fixed manufacturing overhead applied	-

· Note

Product Cost:	Period Cost:
>Product costs the cost that can be attributed to the production of a product.	>These are not related to the production of the product.
>Product costs include direct material cost, direct labor cost, and manufacturing overheads.	>These cost includes Selling expenses, General and Administrative expense, and are not incurred in relation to factory or production.
>Under Variable costing, FIXED manufacturing overhead is not considered to be a part of Product Cost.	>Fixed manufacturing overhead IS CONSIDERED to be Period Cost under Variable costing.
>Under Absorption costing, BOTH variable manufacturing overhead AND fixed manufacturing overhead form part of the product cost.	>BOTH Variable and Fixed selling and administartive expense are considered PERIOD cost under BOTH Variable and Absorption costing method.