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ABSORPTION COSTING
and
VARIABLE COSTING

ABSORPTION COSTING INCOME STATEMENT

Direct collections earned by a company for selling
its products to customers
...
These are costs to produce the
cost of goods that are sold
...


Also known as Selling, general, and administrative
expenses that are necessary in doing business to
reach-out customers and maintain records as well as
introducing the products to them
...
Profit if
Gross profit is higher than expenses while Loss when
Expense is greater than Gross profit
...
Sold Units x Variable Selling, General and
Administrative cost per unit;
2
...
For example, cost of
wood used to create table
...


VARIABLE
MANUFACTURING
OVERHEAD

Term used to describe fluctuating costs
used to manufacture a product
...
For example, production
supplies

FIXED
MANUFACTURING
OVERHEAD

These are production costs that do not
change even while the volume of
production increases or decreases
...


WHAT IS PRODUCT COST ?

This is the actual cost of product that does not include any mark-up
...
For Absorption Costing, the product costs are Direct Materials, Direct Labor, Variable
Manufacturing Overhead and Fixed Manufacturing Overhead
...

Note that under the Absorption costing treats fixed factory overhead as a product cost
...

For example, Sales Commission
...
For example, Salary and Wages of
Security department

WHAT IS PERIOD COST ?

These costs are necessary for business operations aside from costs incurred in producing the
product
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It may be Variable or Fixed
...


VARIABLE COSTING INCOME STATEMENT

Direct collections earned by a company for selling
its products to customers
...
These
includes Variable Manufacturing and Variable
Selling, General and Administrative expense
...
It
represents the sales revenue that is not consumed by
variable costs and so contributes to the coverage of
Fixed Costs
Unlike Absorption costing, ALL fixed costs whether
used in manufacturing or not is treated as expense
under Variable Costing
It is the Net amount of income generated after
deducting Fixed Costs
...


VARIABLE COSTING INCOME STATEMENT

Sold units x Selling Price

Sold units x Variable Cost per unit
...
Produced units x Fixed Manufacturing cost per unit
...
Produced units x Fixed Selling, General, and
Administrative per unit
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Contribution Margin – Fixed Costs

VARIABLE COSTING INCOME STATEMENT
VARIABLE MANUFACTURING COST includes the following:

Direct Materials

VARIABLE
MANUFACTURING COST

Direct Labor
Variable Manufacturing
Overhead

VARIABLE
SELLING, GENERAL,
AND ADMINISTRATIVE
EXPENSE

There are two (2) categories of VARIABLE COST:
Variable Manufacturing Cost (which is composed of Direct materials, Direct Labor and Variable Manufacturing Overhead);
and the Variable Selling, General, and Administrative expenses
...


VARIABLE COSTING INCOME STATEMENT
Since Variable Cost can be broken down into Variable Manufacturing cost and Variable Selling, General, and
Administrative Expense, the expanded format of Variable Costing income statement would be:

Manufacturing Margin has the same concept with
Gross Profit of Absorption Costing where it represents
the difference between how much it costs to create
something, known as Product Cost and for how
much they sell the product
...
Only the Variable Manufacturing Costs
(Direct Materials, Direct Labor, and Variable Manufacturing Overhead)
are product costs
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Comprehensive Illustration
During December 2023, ABC, Inc
...
00 per unit and costs as
follows:
Materials
$ 12,000
Labor
6,600
Total Manufacturing Overhead (50% Variable)
8,000
Total Manufacturing Costs
26,600
Selling, General, and Administrative costs incurred during the
month were:
Variable SGA Expenses
Fixed SGA Expenses

$ 6,000
4,000
10,000

What is the product cost for Absorption Costing?
Answer: 13
...
3
What is the Variable Cost per unit for purposes of computing
Contribution Margin?
Answer: 14
...

These are the total costs of Variable
and Fixed Manufacturing
...
Variable manufacturing
cost is based on Units Sold, which is 2,000 while Fixed
Manufacturing cost is based on units produced, which is
2,000 as well
...
For this problem, units sold is
2,000
...
Fixed Manufacturing Costs
should not be included as product cost under
Variable Costing that is why we multiply 8,000 by 50%
because the other 50% is the amount for Fixed
Manufacturing Cost
...

Only Materials, Labor, and Variable Manufacturing Overhead
are product costs, however, for the purpose of computing
Contribution Margin, we must consider the effect of Variable
Selling, General, and Administrative Expenses
...
These costs
are still period costs under the Variable
Costing; however, they are considered to
calculate the Contribution Margin
...

Variable Costing method argues that Fixed Costs should be
expensed outright because they are incurred anyway
regardless of how many units are sold
...
Selling, General, and administrative costs, whether Variable or Fixed, is
always treated as PERIOD COSTS under both Absorption Costing and
Variable Costing systems
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Depreciation Expense is not always a Period Cost
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It depends on what the company depreciate
...
On the other hand, if the equipment or
machine is used aside from producing a unit, such as computer for
accounting office or CCTVs for security, then we classify the depreciation
as Period Cost
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Absorption Costing is also called Full Costing
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Absorption Costing is used for external reporting purposes
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Conversion Cost is the sum of Direct Labor and Manufacturing Overhead
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Prime Cost is the sum of Direct Materials and Direct Labor
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If units produced is equal to units sold, the income under Variable Costing
and Absorption Costing should be the same
...
In this next Comprehensive Illustration,
what if Units produced is not equal to Units sold
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produced 2,000 units and sold
1,000 units of Product A with selling price of $50
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6
What is the product cost for Variable Costing?
Answer: 22
...
6
What is the Operating income under Absorption Costing?
Answer: $ 15,400
What is the Operating income under Variable Costing?
Answer: $ 13,400

Variable Manufacturing Costs are
based on Units sold
...


Notice that the product cost for
absorption costing uses both
Units produced and Units Sold,
unlike variable costing that uses
Units sold
...

If Produced units is greater than Sold units:
This means that there is an increase in inventory
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NOTE!

There’s no need for reconciliation
if Units produced is equal with
Units sold because they will have
the same amount of operating
income
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Fixed Overhead expensed under absorption costing
Is more than Fixed overhead expensed under variable costing
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Complies with International Accounting
Standards 2 (Inventories)
2
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3
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Meet requirements of external reporting
5
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1
...

2
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3
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4
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VARIABLE COSTING
1
...

2
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3
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4
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5
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1
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2
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3
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4
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5
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