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  • MAS-Absorption COsting

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    This document summarizes absorption costing and variable costing. Absorption costing includes all manufacturing costs as product costs, including fixed factory overhead, while variable costing only includes variable costs as product costs and treats fixed factory overhead as a period cost. The key difference between product costs and period costs is that product costs are allocated to inventory and cost of goods sold, while period costs are fully expensed. Supporters of variable costing argue that fixed factory overhead should be expensed since it is incurred to have production capacity, while absorption costing supporters believe all manufacturing costs are necessary for production. Variable costing results in lower inventory balances than absorption costing since it fully expenses fixed factory overhead.

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    Absorption and Variable Cost

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    This document summarizes absorption costing and variable costing. Absorption costing includes all manufacturing costs as product costs, including fixed factory overhead, while variable costing only includes variable costs as product costs and treats fixed factory overhead as a period cost. The key difference between product costs and period costs is that product costs are allocated to inventory and cost of goods sold, while period costs are fully expensed. Supporters of variable costing argue that fixed factory overhead should be expensed since it is incurred to have production capacity, while absorption costing supporters believe all manufacturing costs are necessary for production. Variable costing results in lower inventory balances than absorption costing since it fully expenses fixed factory overhead.

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    5 views1 page

    MAS-Absorption COsting

    Uploaded by

    Review Era
    This document summarizes absorption costing and variable costing. Absorption costing includes all manufacturing costs as product costs, including fixed factory overhead, while variable costing only includes variable costs as product costs and treats fixed factory overhead as a period cost. The key difference between product costs and period costs is that product costs are allocated to inventory and cost of goods sold, while period costs are fully expensed. Supporters of variable costing argue that fixed factory overhead should be expensed since it is incurred to have production capacity, while absorption costing supporters believe all manufacturing costs are necessary for production. Variable costing results in lower inventory balances than absorption costing since it fully expenses fixed factory overhead.

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    MS-03: ABSORPTION & VARIABLE COSTING ABSORPTION COSTING – is a costing method that includes all

    manufacturing costs – direct materials, direct labor, variable and fixed factory overhead – in the cost of
    a unit of product. It treats fixed factory overhead (FFOH) as a product cost. Absorption costing is also
    known as full costing. VARIABLE COSTING – is a costing method that includes only variable
    manufacturing costs – direct materials, direct labor, and variable manufacturing overhead – in the cost
    of a unit of product. It treats FFOH as a period cost. Variable costing is also called direct costing.
    PRODUCT vs PERIOD COST A product cost is an inventoriable cost that is subject to allocation between
    sold and unsold units. Current income is reduced only by the amount allocated to the sold units.
    Consider the following allocation: UNSOLD UNITS Asset (as Inventory) PRODUCT COST SOLD UNITS
    Expense (as Cost of Goods Sold) A period cost is a cost that is charged as expense against income,
    regardless of the sales performance. No allocation is necessary; current income is reduced by the full
    amount of the period cost. PRODUCT COST FULLY EXPENSED in the period incurred, regardless of sales
    ABSORPTION vs VARIABLE COSTING 1.) RATIONALE Supporters of variable costing argue that FFOH are
    costs are incurred in order to have the capacity to produce units. These costs are incurred whether or
    not production occurs. Thus, FFOH costs, having no future service potential, should be fully expensed in
    the same period occurred. Supporters of absorption costing believe that all manufacturing costs –
    variable and fixed – are necessary for production to take place and hence should not being ignored in
    determining product costs. 2.) INVENTORIES Since FFOH costs are simply expensed (i.e., period cost)
    under the variable costing, the peso amount of inventories under variable costing is always lower than
    the peso amount of inventories under absorption costing

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