Absorption vs Variable Costing

Absorption vs Variable Costing Meaning

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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Absorption vs Variable Costing, Direct Costing, Full Costing

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Absorption vs Variable Costing, Direct Costing, Full Costing

See Also:
Absorption vs variable costing Advantages and Disadvantages
Variable vs Fixed Cost
Semi Variable Costs
Activity Based Costing vs Traditional Costing
Absorption Cost Accounting

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