Question

please provide discussions on Variable Costing and Absorption Costing Income Statements, State the difference between the two.

Please answe in word format only more than 350 words.

Please dont copy the data from wikipedia or investopedia.

Answer 1

Income Statement:

Financial statements are prepared and published as a part of annual report of a company. Income statement is an integral part of those financial statements that present the profitability of a company during that period.

Variable Costing:

The approach for allocating the fixed manufacturing overhead based on the period of occurrence of those overhead is called variable costing. It works on the principal to record the costs in the same period in which the benefits from those costs are recorded.

Absorption Costing:

The absorption costing approach for the fixed manufacturing overhead is based on the principal that this overhead must be recorded as and when the inventory is sold not in the period it was actually incurred.

Difference between variable costing and absorption costing income statement:

• The method to record the fixed manufacturing overhead is different in both the income statements based on the two costing methods.
• It affects the final outcome of income statement that is the net profit because net profit is the excess of revenue over the expenses listed on the income statement.
• The variable costing income statement considers the complete costs of fixed manufacturing overhead incurred during a specified period.
• It include that cost on the income statement as the total costs are deducted from the sales revenue or service revenue.
• The balance after total costs are deducted from revenue is reported as net income
• The absorption costing income statement only considers the fixed manufacturing overhead on the basis of time of inventory sold.
• It allocates the costs of those overhead when the product is sold not when it is manufactured.
• As a result, the net income from both the income statements is different at times of change in inventory for a period.
• Increased inventory will result in increased portion of fixed manufacturing overhead allocated to inventory and reduced portion of fixed manufacturing overhead allocated to cost of sales.
• So, under absorption costing, if the inventory is increased than the fixed overhead cost, to be included in cost of sales will be reduced and results in higher net income.
• Under variable costing, if the inventory is reduced than the fixed overhead cost, to be included in cost of sales will be reduced and results in higher net income.