"Variable Cost and Absorption Costing"

Variable Costing and Absorption Costing

"Variable Cost and Absorption Costing"
Difference Between Variable Costing and Absorption Costing

Variable cost:

Variable cost is a cost that varies with the level of output.

Variable costs are those costs that vary depending on a company’s production volume; they rise as production increases and fall as production decreases.

Variable costs can include direct material costs or direct labor costs necessary to complete a certain project. For example, a company may have variable costs associated with the packaging of one of its products. As the company moves more of this product, the costs for packaging will increase. Conversely, when fewer of these products are sold the costs for packaging will consequently decrease.

Absorption Costing:

Total absorption costing (TAC) is a method of Accounting cost which entails the full cost of manufacturing or providing a service. TAC includes not just the costs of materials and labour, but also of all manufacturing overheads.

A managerial accounting cost method of expensing all costs associated with manufacturing a particular product. Absorption costing uses the total direct costs and overhead costs associated with manufacturing a product as the cost base. Generally accepted accounting principles (GAAP) require absorption costing for external reporting.

Absorption costing is also known as “full absorption costing”

Some of the direct costs associated with manufacturing a product include wages for workers physically manufacturing a product, the raw materials used in producing a product, and all of the overhead costs, such as all utility costs, used in producing a good.

Absorption costing includes anything that is a direct cost in producing a good as the cost base.

Finally i am going to say, the information provided by variable costing method is mostly used by internal management for decision making purposes. Absorption costing provides information that is used by internal management as well as external parties like creditors, government agencies and auditors etc.

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