Absorption & Variable Costing:

                   Managerial Accountants using the absorption and variable costing methods in their accounting but before going to explain both methods we need to understand the Factory Over Head or FOH Costing. The FOH is based on those indirect direct material, indirect direct labor and Utility Costs which support the manufacturing department in production indirectly. Managerial Accountants using two different methods to use the FOH and manage their manufacturing activities that methods are known as Absorption or Full Costing methods and Variable or Direct costing methods.

Absorption Costing:

                Absorption Costing is a method of costing which is normally used by managerial accountants during their manufacturing concerns accounting. Most people can know it as full costing. The Absorption Costing has many features which are very important to know for everyone before moving further to memorize the complete concept about it. These features are as follows:

·         Absorption costing concept is a full costing method.

·         It is also based on the inventory management situation and according to the given situation the managerial accountant uses it.

·         During the production accounting the portion of goods available for sales is known as product costing.

·         The portions of Selling and Administrative expenses are known as period costing.

·         The Income is manipulated by management action in absorption costing.

·         Absorption Costing is recording under GAAP principles and it is for external reporting purposes users  

·         The Operating income of the absorption costing always is different from the variable costing.

·         When the production cost is greater than the sales so that is known as absorption costing.

·         At the end of the absorption costing method, the production department has a sufficient number of inventories in stock.

That’s the some of the key main features of the Absorption Costing to understand it.

Formula:

Formula to understand the Absorption or full costing method is as follows;

Variable Costing:

                Variable Costing is a method of production costing during the manufacturing of products or goods and managerial accountants using it during their accounting practices. That Variable Costing is also known as direct costing, prime costing or contribution margin costing. There are many features the variable costing has which are very unique and important to know before using this method of costing in practical managerial accounting. These features are as follows.

·         According to the variable costing concept, the FOH or Factory overhead Cost use in this method maintains the Capacity of that production and not directly link with the cost of producing a product or manufacture a product.

·         The main advantage of Variable costing over the absorption costing is that income cannot be manipulated by the management.

·         The portion of Cost of goods available for sales is based on the variable costing both in production and Selling and administrative expenses cost.

·         The period costing portion is based on the fixed costs.

·         When the Production is lower than the sales that are known as variable costing.

·         At the end of variable costing method, the production department has very less or limited inventory in stock.

·         Variable Costing method is used for internal reporting purposes.

That’s the some of the key features of the variable costing which helps us to understand it easily.

Formula for Variable Costing method:

Formula for Variable Costing method is as follows;