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Variable Costing: Compare and contrast variable costing with absorption costing, highlighting the differences between operating income....

Variable Costing: Compare and contrast variable costing with absorption costing, highlighting the differences between operating income. Discuss the use of variable costing for decision making in a manufacturing company and a service company.

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Expert Solution

Difference between Variable Costing and Absorption Costing:

Variable Costing: Under Variable costing only variable cost is allocated to the product cost. Variable cost means only those cost which vary with the level of output. For e.g. Direct Material, Direct Labour etc.

Absorption Costing : Under absorption costing all the manufacturing cost including fixed cost is allocated to the product cost. It means it includes both variable as well as fixed cost.

Effects on operating income : As mention above the main difference between variable costing and absorption costing is the treatment of fixed cost.

Since absorption costing includes the fixed cost operating income under Absorption costing will be less and will be lower in case of variable costing because it includes only variable cost.

Use of variable costing: variable costing is mainly used for decision making purpose. For E.g:

In manufacturing concern Variable costing is used when they want to analyse the production of an additional product which will not affect the fixed cost or when they want to accept or reject a order or for Calculation of Break Even Point.

In service industry variable costing is used to check the profitability of a particular service to a customer . Or accept or reject a new service order.

ekkarill92 answered 2 years ago
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