What is the primary difference between variable costing and absorption costing? Why do you think that...

What is the primary difference between variable costing and absorption costing? Why do you think that two such different methods of costing were developed? In what type of situation would an organization choose one costing method over the other?

Expert Solution

Answer:-

Variable cost may be defined as a method in which all the variable expenses are assigned to a product and fixed expenses are incurred over a period of time and not on product

Absorption cost allocates all the expenses whether fixed or variable to product.Thus, it allocates a portion of fixed cost also to product.

Two different methods of costing were developed in order to solve the purpose of managerial decisions as well as accounting purpose. Absorption costing is in line with the GAAP and thus for accounting prupose true profit is to be reflected which is possible through adoption of absorption cost. Variable costing helps managers in making decision on continuance or disconituance of product.

If a company wants to analyse its profit of different product lines, variable costing would be best suited.

If a company wants to know accurate distributable profits, absorption costing is preferred.

ekkarill92 answered 2 years ago

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