Question

What is the difference between full absorption of costing and variable costing? Why is using GAAP is required for one of the costings while the other makes sense for making internal making choices? Discuss benefits and disadvantages of each one for the external and internal use.

Answer 1

Key difference between full absorption of costing and variable costing

1.Absorption costing includes all costs, including fixed costs, related to production, while variable costing only includes the variable costs directly incurred in production.

2.Absorption costing, also known as full costing, entails allocating fixed overhead costs across all units produced for the period, resulting in a per-unit cost

3.Variable costing can make it more difficult to determine ideal pricing for its goods and services since it does not directly considered all the cost.

using in GAAP

One of the big advantages of absorption costing is that it is the method required for a company to be in compliance with generally accepted accounting principles (GAAP). Even if a company decides to use variable costing in-house, it is required by law to use absorption costing in any external financial statements it publishes. Absorption costing is also the method that a company is required to use for calculating and filing its taxes.