Variable Costing vs Absorption Costing in Cost Accounting

Variable costing and absorption costing are two commonly used methods in cost accounting. Understanding the difference between the two can help in decision making processes.

Variable Costing:

Variable costing considers only the variable manufacturing costs (such as direct materials, direct labor, and variable overhead) as product costs. Fixed manufacturing costs are considered period costs and are not allocated to products. This method is useful for decision making as it provides a clear understanding of the costs directly associated with producing goods.

Absorption Costing:

Absorption costing, on the other hand, allocates both variable and fixed manufacturing costs to products. This method includes all manufacturing costs (direct materials, direct labor, variable and fixed overhead) as product costs. Absorption costing is often preferred for external reporting and tax purposes as it allows for a better matching of costs to revenues.

Which is more suitable for decision making purposes?

When it comes to decision making, variable costing is often considered more suitable. This is because variable costing provides a clearer picture of the costs directly associated with production, making it easier to analyze and understand the impact of decisions on the profitability of products or services. Absorption costing, while useful for other purposes, may sometimes obscure the true cost of production and lead to misleading decisions.

In conclusion, while both variable costing and absorption costing have their advantages, variable costing tends to be more suitable for decision making purposes due to its clarity and focus on variable costs.