Variable and Absorption Costing CMAPart 1 Variable and Absorption Costing Variable and absorption costing are simply two different ways of determining the cost of production and presenting the income statement. Despite the fact that these are often presented as opposite to each other, there are only two differences between them that you need to know about, which are: 1) The treatment of fixed factory overhead costs (for example, factory rent), and 2) The presentation on the income statement of different costs. Note: All other costs except for fixed factory overheads are treated in the same manner under both of these methods, but they may be reported in a different manner on the income statement. We will first look at the difference in the treatment of fixed factory overheads under each of these two methods, and then we will look at the income statement presentation under each method. Fixed Factory Overheads Under Variable Costing Under variable costing (also called direct costing), fixed factory overheads are a period cost that are expensed in the period when they are incurred. This means that no matter what the level of sales, all of the fixed factory overheads will be expensed in the period when incurred. Fixed Factory Overheads Under Absorption Costing Under absorption costing, fixed factory overhead costs are allocated to the units produced during the period according to some predetermined ratio and are therefore a product cost. Under the absorption method, the profit of a company is influenced by the difference in the level of production and the level of sales. When the level of production is higher than the amount of sales, some of the fixed manufacturing
Posted on: Fri, 17 Jan 2014 06:23:58 +0000
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