Variable Costing Method Paper

1. The difference between absorption and variable costing is in how they mange fixed manufacturing overhead. Under absorption costing, fixed manufacturing overhead is treated as a product cost, therefore, is an asset until products are sold. Under variable costing, fixed manufacturing overhead is treated as a period cost and is immediately expensed on the income statement. Both methods threated all other costs the same way.
2. Selling and administrative expenses are treated as period costs under both variable costing and absorption costing and these expenses are never treated as product costs under variable or absorption costing method.
3. Fixed overhead costs of manufacturing are included in product costs, direct materials, direct labor and variable manufacturing overhead, under absorption costing method. If some of the …show more content…
Part of the arguments in favor of treating fixed manufacturing overhead costs as product costs is that all manufacturing costs must be assigned to products in order to properly match the costs of producing the products with their profits when they are sold. The defenders of absorption costing argue that fixed costs are just as important to manufacturing products as are the variable costs. They also believe that the absorption costing method matches costs with profits better than variable costing method.
5. Part of the arguments in favor of treating fixed manufacturing costs as period costs is that the fixed manufacturing costs are not the costs of any unit of product. The fixed manufacturing costs will be the same, whether the product is made or not. Because fixed manufacturing costs are not part of the production costs of a particular product unit, the matching principle imposes that they must be charged to the current period.
6. If the units produced and unit sales are equal, we should expect the same net operating income under both variable and absorption costing method, because when production equals sales, there is not change in