Absorption vs Variable Costing

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.
[box](NOTE: Want to take your financial leadership to the next level? Download the 7 Habits of Highly Effective CFO’s. It walks you through steps to accelerate your career in becoming a leader in your company. Get it here!)[/box]

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.
As a financial leader, it is your responsibility to add value. One way to add value is to reduce costs; start managing costs today. If you want to learn other ways to add value to your company, then download the free 7 Habits of Highly Effective CFOs. Find out how you can become a more valuable financial leader.
Absorption vs Variable Costing, Direct Costing, absorption vs variable costing advantages and disadvantages

[box]Strategic CFO Lab Member Extra
Access your Flash Report Execution Plan in SCFO Lab.
Click here to access your Execution Plan. Not a Lab Member?
Click here to learn more about SCFO Labs[/box]

Absorption vs Variable Costing, Direct Costing, absorption vs variable costing advantages and disadvantages

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

ARTICLES YOU MIGHT LIKE

Financial Ratios

See also:Quick Ratio AnalysisPrice to Book Value AnalysisPrice Earnings Growth Ratio AnalysisTime Interest Earned Ratio Analysis Use of Financial Ratios Financial Ratios are used to measure financial performance against standards. Analysts compare financial ratios to industry averages (benchmarking), industry standards or rules of thumbs and against internal trends (trends analysis). The most useful comparison when

Read More »

CPA’s are Specialized

The Difference in CPAs Looking back at my career I don’t know how many times I have introduced myself to someone and they ask, “Are you a CPA?” and I say yes. Then they tell me “you must be very busy with tax season” and I look at them with a bit of awe and

Read More »

Accounting VS. Bookkeeping

In our industry we often run into businesses that do not understand the difference between bookkeeping and accounting.  It is not the business owner’s fault. After all, they are in the business of making money for whatever service or product they sell.  But, to know if you are making any money you need to measure

Read More »

JOIN OUR NEXT SERIES

Financial Leadership Workshop

MARCH 28TH-31ST 2022

SHARE THIS ARTICLE
Share on facebook
Share on twitter
Share on linkedin

JOIN THE NEXT STRATEGIC CFO™ SERIES

Strategic CFO™ Financial Leadership Workshop
The Art of the CFO®

Days
Hours
Min
Sec

June 13th - 16th 2022