DIFFERENCES REGARDING COST CALCULATION IN ABSORPTION COSTING METHOD AND VARIABLE COSTING METHOD
DIFFERENCES REGARDING COST CALCULATION IN ABSORPTION COSTING METHOD AND VARIABLE COSTING METHOD

Summary/Abstract: The cost of the product is the basis for calculating the cost of goods sold, and the net operating income. Given the difference between the accounting treatment of fixed overhead, the variable and absorption-costing methods may lead to different operating income figures. Absorption costing method allocates all manufacturing costs to the product cost that is direct materials, direct labour, and variable and fixed manufacturing overhead. Under this method, fixed overhead is assigned to the product cost and is expensed in the reporting period that the product is sold. Variable costing method takes into account the difference between fixed and variable manufacturing costs. This method assigns only variable manufacturing costs to the cost of the product and fixed overhead is treated as a period expense being excluded from the product cost.

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