Variable Costing
Under variable costing , only those manufacturing costs that vary with output are
treated as product costs.
This would usually include direct materials, direct labor, and the variable portion of
manufacturing overhead.
Fixed manufacturing overhead is not treated as a product cost under this method. Rather,
fixed manufacturing overhead is treated as a period cost and, like selling and administrative
expenses.
Consequently, the cost of a unit of product in inventory or in cost of goods sold under the
variable costing method does not contain any fixed manufacturing overhead cost.
Variable costing is sometimes referred to as direct costing or marginal costing.
Absorption Costing
Absorption costing treats all manufacturing costs as product costs,
regardless of whether they are variable or fixed.
The cost of a unit of product under the absorption costing method
consists of direct materials, direct labor, and both variable and fixed
manufacturing overhead.
Thus, absorption costing allocates a portion of fixed manufacturing
overhead cost to each unit of product, along with the variable
manufacturing costs.
Because absorption costing includes all manufacturing costs in product
costs, it is frequently referred to as the full cost method.
• Dexter Corporation produces and sells a single product, a wooden
hand loom for weaving small items such as scarves. Selected cost and
operating data relating to the product for two years are given below:
Required:
• 1. Assume the company uses absorption costing.
• a. Compute the unit product cost in each year.
• b. Prepare an income statement for each year.
• 2. Assume the company uses variable costing.
• a. Compute the unit product cost in each year.
• b. Prepare an income statement for each year.
• 3. Reconcile the variable costing and absorption costing net operating
incomes.
Absorption Costing Unit cost
Absorption costing Income
Statement
Unit Cost Variable costing
Variable Costing Income Statement
Reconciliation of the variable
costing and absorption costing net
operating income.
