FINANCIAL

MANAGEMENT
ACG016
 COMPARISON OF
VARIABLE & ABSORPTION
COSTING
LECTURE WEEK NO.
5
DIFFERENCE IN VARIABLE AND
ABSORPTION COSTING
There are some in differences between Variable and
Absorption Costing.
1. The Income Statement Presentation.
2. The Cost of Goods Sold
3. The Total Expenses
4. The Net Income
Sample Illustration:
Let’s refer to the previous illustration:
In the Sample illustration Production (1,000 units) is Higher than Sales
(900 units) so the Net Income Should be higher in Absoprtion Costing
(P7,800) than variable costing (P7,000).
RECONCILIATION OF NET INCOME UNDER
VARIABLE COSTING WITH NET INCOME
UNDER ABSORPTION COSTING
RECONCILIATION OF NET INCOME UNDER ABSORPTION COSTING WITH NET INCOME UNDER VARIABLE COSTING
Managers prefer Variable costing over Absorption Costing because in variable
costing, only variable manufacturing costs are included in a unit’s product
cost, and thus in the value of inventory and cost of goods sold. Fixed
manufacturing overhead is excluded. It is reported as a separate expense and
deducted from the contribution margin along with fixed selling and
administrative expense in determining operating income.

Managers prefer Variable costing over Absorption Costing because in variable

costing because it separates fixed from variable cost as in Cost Volume Profit
Analysis. As a result, it is easier to compare actual operating income to
planned operating income. With absorption costing, actual operating income
corresponds well with planned operating income only when inventory levels
remain unchanged. With variable costing, income is more closely associated
with sales while absorption costing is influence by units produced and units
sold.
REFERENCE
• Cabrera, M.E. & Cabrera, G.A. (2017). Management Accounting
(2017 Edition). GIC Enterprises & Co., Inc.