Question

1 . Discuss the differences between variable and absorption costing

2 under what specific circumstances would you expect net income to be larger under variable costing than under absorption costing? What is the reason for this difference

Answer 1

1) Variable costing is a managerial accounting cost concept. Under this method, manufacturing overhead is incurred in the period that a product is produced. Absorption costing (also known as full absorption costing) indicates that all of the manufacturing costs have been assigned to (absorbed by) the units of goods produced. In other words, the cost of a finished product includes the following costs: direct materials, direct labor, variable manufacturing overhead.
The main difference between variable costing and absorption costing is the accounting for fixed manufacturing costs. Absorption costing includes all of the direct costs associated with manufacturing a product, while variable costing can exclude some direct fixed costs. Variable costing includes all of the variable direct costs in COGS but excludes direct, fixed overhead costs.