Variable costing is a method that is used by companies, and the method is also known as direct costing or marginal costing. Absorption costing is another method of costing, and this method of costing is known as traditional costing and full costing method.
Both methods are used to apply production cost to services or products. Treatments of manufacturing and fixed cost are the main difference that happens when both costing methods are used. Manuals as variable and absorption costing homework answers can help you deal with concepts and basic pointers of this subject.
Fixed manufacturing cost is used for the period that it incurs under direct costing method known as variable costing method. Fixed manufacturing cost occurs when a product is sold under absorption costing method.
Advantages of variable costing
Variable costing never takes into account all costs that company incurs, what is the ideal pricing that is needed to make it profitable. The costing method rather it takes into account only expenses that come with direct production, amount that is needed to make it profitable.
Cost volume profit analysis works better in variable costing method. Every company would like to know a breakeven point of a product that would enable a company to land in profit, and variable costing method would enable that.
Advantages of absorption costing
Absorption costing is an important part that is sued in taxes, and there is a legal formality that requires a use of absorption costing.Net profitability comes into the picture in true sense when absorption cost method is sued. That would help the company to project a real image to shareholders and other investors. This transparency would enhance company brand image.
Manufacturing costs are always considered as product costs, and they are included in inventory. When sales occur the inventory cost is transferred to cost of goods sold, and that would mean that gross profit is reduced by manufacturing costs and these costs would relate to direct materials, variable overhead expenses, direct labor and so on.
Absorption cost would ensure that product is reported as full cost or complete cost and fixed manufacturing overhead gets a real good meaning and sense when used with absorption costing
Disadvantages of absorption costing
- Absorption costing can use profit and loss data to be skewed as in normal terms fixed costs are not deducted from revenues.
- Variation levels are hard to understand, and that can send wrong signals to management, an Operational efficiency of a company is affected if too much leaning on absorption cost is done.
Example of absorption costing and variable costing
Assume that there is a company that is manufacturing product and selling it. Let us think that company manufactures 10000 items or units in one year. If we find out the cost of producing one unit we can easily find both costs. Manuals as variable and absorption costing homework answers can be of real help.
Assume the cost as follows
Direct materials that are used in manufacturing a product is $ 10 per unit
The labor cost that incurs for the company is $9 per unit
The manufacturing overhead under the variable is considered as $1 per unit, and fixed manufacturing cost is $ 40000 per year.
The unit product cost of the company is computed as follows:
$ 10 +$9+$1+ $40000/10000 items=
This is the absorption costing.
Variable Costing: $10 + $9 + $1 = $20
Costing homework assignment for students
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