Essay on Absorption and Variable Costing,

1607 Words May 12th, 2011 7 Pages
Absorption and Variable Costing, Inventory Management

Absorption and Variable costing are very important tools for cost accounting. Both of these costing methods allow you to see the cost of your inventory, in a different way. For example the absorption method allows you to assign all costs to the product, while variable costing allows only variable costs to be assigned to the product. Inventory management is extremely important as well because it ties into efficiency and lowering your costs so that your company can be as profitable as it can in operations. Throughout this paper I will discuss the importance of both costing methods, how it is implemented as well as using the income statement for costing. Most companies don’t
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The variable costing income is greater than the absorption costing by the amount of fixed overhead coming out of the beginning inventory from the current period. But if the production and the sales are equal than there is no difference between the two reported incomes. The income relationship is consider to be that if production is greater than sales than the absorption income is greater than the variable income. But if the production is less than the sales than the absorption income is less than the variable income. So than if the production equals the sales than the absorption income is also equal to the variable income.
The differences between the absorption and variable costing are the recognition of when the expenses are occurred. The recognition of the expenses associated with the fixed factory overhead. With the absorption costing, the fixed factory will than be assigned to the units produced. This actually presents two problems, first, how do we convert the factory overhead applied on the basis of direct labor hours or the machine hours into factory overhead applied to the units produced? Also, what is than done when actual factory overhead does not equal applied factory overhead? Now we move onto the variable costing and the segmented income statements. The variable costing is a useful tool in preparing a

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