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Prelim Week4

Variable costing regards only variable manufacturing costs as product costs and expenses fixed costs in the period incurred. It highlights contribution margin and facilitates decision making. Advantages are income is unaffected by inventory changes as fixed costs are expensed. Disadvantages include it may encourage short-term profit planning and is not acceptable for external reporting. Absorption costing treats all manufacturing costs, fixed and variable, as product costs and is generally accepted for external reporting under GAAP.

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31 views11 pages

Prelim Week4

Variable costing regards only variable manufacturing costs as product costs and expenses fixed costs in the period incurred. It highlights contribution margin and facilitates decision making. Advantages are income is unaffected by inventory changes as fixed costs are expensed. Disadvantages include it may encourage short-term profit planning and is not acceptable for external reporting. Absorption costing treats all manufacturing costs, fixed and variable, as product costs and is generally accepted for external reporting under GAAP.

Uploaded by

John Paul Morales
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPTX, PDF, TXT or read online on Scribd
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FINANCIAL

MANAGEMENT
ACG016
VARIABLE & ABSORPTION
COSTING
LECTURE WEEK NO.
4
VARIABLE COSTING
- Is a method of recording and reporting costs which regards
only the variable manufacturing costs as product costs.
Fixed manufacturing costs are written off as period costs.
- Proponent of this product costing method maintain that the
fixed part of factory overhead is more closely related to the
capacity to produce than to the production of specific units
and therefore should be charged off as an expense in the
period incurred. The use of this system highlight the
contribution margin of the product and therefore facilitates
managerial decision-making process.
Advantages of Variable Costing
• Net income using variable costing is not affected by
changes in inventory levels because all fixed costs are
deducted from income in the period in which they
occur.
Disadvantages of Variable Costing
1. It may encourage a shortsighted approach of profit
planning at the expense of the long-run situation.
2. Variable costing tends to give the impression that variable
costs are recovered first, that fixed costs are recovered later
and that finally profits are realized.
3. Variable costing is not acceptable for external reporting
and tax purposes.
ABSORPTION COSTING
• Also known as full, traditional, conventional and
normal costing is a method of product costing in
which all manufacturing costs, fixed and variable, are
treated as product or inventoriable costs. This method
is generally accepted for external reporting purposes
(GAAP).
Illustrative Problem
REFERENCE
• Cabrera, M.E. & Cabrera, G.A. (2017). Management Accounting
(2017 Edition). GIC Enterprises & Co., Inc.

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