Absorption Vs Variable Costing


Absorption costing is also called as “full costing” and is that type of costing which includes all the costs of production as product costs irrespective of whether they are fixed or variable. Thus, the cost of unit of a product under absorption costing would include direct materials, direct labor and both fixed and variable overheads.

Variable costing is also called as marginal costing or direct costing. It is that type of costing which allocates only the variable portion of the manufacturing overheads to a product unit cost. Thus, the cost of unit of a product under variable costing would include direct materials, direct labor and only the variable portion of the manufacturing overhead. Fixed manufacturing overhead is treated as a period cost.

Absorption Vs Variable Costing – Difference and features

Example: Let us differentiate both the costing methods with an example.

Company A produces a product with the following cost structure:

Number of Units produced = 5000
Direct materials = $3 per unit
Direct Labor = $4 per unit
Variable manufacturing overhead = $2 per unit
Variable selling & admin. Expenses = $4 per unit
Fixed manufacturing overhead = $20,000
Fixed selling & admin expenses = $15000

Let us find the unit product cost under both absorption & variable costing:

Absorption costing:

Direct materials = $3.00
Direct Labor = $4.00
Variable manufacturing overhead = $2.00
Total variable production costs = $9.00
Fixed manufacturing overhead
Per unit = $20,000/5000 units = $4.00
UNIT PRODUCT COST = $13.00

Variable Costing:

Direct materials = $3.00
Direct Labor = $4.00
Variable manufacturing overhead = $2.00
UNIT PRODUCT COST = $9.00

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