The cost of a product plays a significant role to determine the profit of the business. Costing is done to estimate and maintain the expenditure of business. Proper costing of products and services decides how long the company will continue to run in the market.
Costing is generally of two types:
Variable Costing:
Variable costing is also known as direct costing. It includes the direct materials, direct labor, and variable manufacturing overhead expenses to determine the cost of a product.
Absorption Costing:
Absorption costing takes into account all the direct and indirect expenses to determine the cost of a product. It is also known as full costing.
For any accounting or economics student, it is essential to know how the cost of a product is determined. Therefore, you need to understand the process of cost before you can write a paper. In order to understand the costing methods better, you can seek the help of variable costing and absorption costing homework answers. You will get to learn from experts to get exposure to the different costing methods used while manufacturing a product.
Before going further, let us see the differences between variable and absorption costing.
Difference between variable costing and absorption costing
Organizations use both variable costing and absorption costing to determine the cost of a product or service. A company cannot choose between any one of the costing methods as they have advantages and disadvantages.
- Variable costing includes only the direct expenses to determine the unit cost; absorption costing uses both the direct and indirect expenses.
- Variable costing is used internally for However, absorption costing is used both internally and externally to provide information to both parties.
To understand better let us see an illustration to find the unit cost of a product using both methods
Absorption costing:
Direct materials ($5) + Direct labor ($4) + variable manufacturing overhead ($2) + Fixed Manufacturing overhead of one unit ($4)* = Unit Cost of a product i.e. $15
*(20000/5000) = $4
Variable costing:
Direct materials ($5) + Direct labor ($4) + variable manufacturing overhead ($2) = Unit Cost of a product i.e. $11
Absorption costing is mostly preferred over the variable costing as it includes all the manufacturing expenses to determine the cost of a product. It provides information to the internal management to make future decisions and also to external parties such as creditors and auditors.
As we have seen from the above explanations, the main difference between variable and absorption costing is the treatment of the fixed manufacturing expenses. Companies use both the methods to find the price of the product and make decisions as to which process will generate more profit. It is essential to understand the different costs that occur while manufacturing a product. So with variable costing and absorption costing homework answers, you will be able to remove all your doubts.
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Variable and absorption costing are the two pillars a company uses to calculate per unit cost of a product or service. Without proper costing techniques, a company will not be able to make future decisions that will determine how much profit it makes and how far it plans to grow.
Since costing plays a significant role while calculating the profit of the business, you need to know how to arrive at the value of a product. With the assistance of variable costing and absorption costing homework answers, you will not just be able to submit a first-class assignment but also get to understand the different costing methods.