Difference between Variable & Absorption Costing
When it comes to managerial accounting, the way that information is presented can affect decision-making for a business. In a manufacturing environment, companies can use absorption costing or variable costing when accounting for the costs of products produced. While these methods are similar, they have some key differences that can impact the company.
* Absorption costing, also known as full costing is a method by which all of the expenses associated with producing a product are included in its cost. With absorption costing, you include both the fixed and variable expenses in each individual unit. When the units are priced, any profit margin is added on top of this cost. This method simply breaks all of the costs incurred by the facility down into a per unit cost. Variable Costing
* Variable costing is another method companies can use to account for the costs of items produced. With variable costing, the company only applies the variable costs to each unit. It does not apply the fixed costs involved with manufacturing to each unit. Instead, those costs are applied in the year in which they are incurred by the manufacturing facility. This method subtracts out the fixed costs such as rent and insurance before calculating the per-unit cost.
* Companies regularly use absorption costing because it provides them with a full cost for each item produced. Since the company knows that it has to pay the fixed costs associated with manufacturing, it figures that it might as well divide those costs into each individual unit so that a profit margin can be attached to them. In some cases, the fixed costs associated with manufacturing can be difficult to attach to an individual product. Variable Considerations
* Some companies use a variable costing method because they believe that it is more accurate. Proponents of variable costing argue that the fixed...
Please join StudyMode to read the full document