Absorption vs Variable Costing
Absorption vs Variable Costing
- Other Category: Accounting
- July 22, 2013
- Dan
- absorption costing, direct costing, full costing, manufacturing, overhead, variable costing
In the field of accounting, variable costing (direct costing) and absorption costing (full costing) are two different methods of applying production costs to products or services. The difference between the two methods is in the treatment of fixed manufacturing
overhead costs. Under the direct costing method, fixed manufacturing overhead costs are expensed during the period in which they are incurred. Under the full costing method, fixed manufacturing
overhead costs are expensed when the product is sold.
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Direct Costing System
The direct costing method applies all direct costs as well as variable manufacturing
overhead costs to the end product. These costs move with the product through the inventory accounts until the product is sold, at which point they are expensed on the income statement as costs of goods sold. Fixed manufacturing overhead costs are expensed during the period in which they are incurred.
You can also call direct costing variable costing or marginal costing.
Full Costing Method
The full costing method applies all direct costs and both fixed and variable
manufacturing overhead costs to the end product. All of these costs move with the product
through the inventory accounts until the product is sold, at which point they are expensed on the income statement as costs of goods sold.
You can also call full costing absorption costing.
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