Absorption and Variable Costing

• Product cost


  Inventoriable cost
• Cost flow


  1. Incurrence--Inventories--P/L

  2. Incurrence -- P/L
• Accounting treatment of product cost

  Capitalized first
• Accounting treatment of period cost

  Expense outright
• P/L item for product cost

  COGS
• P/L item for period cost

  OPEX
• Principle for product cost


  Cost and effect
• Principle for period cost

  Immediate recognition
• Absorption costing


  Full costing, required by PFRS, uses conventional income statement, segregates costs by function
• Variable costing


  Marginal costing, internal reporting, only includes variable manufacturing costs, uses contribution margin income approach, segregates costs by behavior
• Throughput costing


  Only includes direct materials cost, super variable cost
• Cost classification under different costing methods

  • Direct materials
  • Direct labor - variable
  • Factory overhead - variable
  • Factory overhead - fixed
  • Selling and admin - variable
  • Selling and admin - fixed
• Capacity levels used to compute budgeted fixed manufacturing rate

  • Theoretical capacity
  • Practical capacity
  • Normal capacity
  • Master-budget capacity utilization
• Alternative cost allocation methods


  • Actual cost system
  • Normal cost system
  • Extended normal cost system or flexible budget
  • Standard cost system or static budget
• Computation of net income under variable costing

  1. Sales

  2. Less: Variable manufacturing overhead cost

  3. Less: Variable selling and admin expense

  4. Contribution margin

  5. Less: Fixed manufacturing overhead cost

  6. Less: Fixed selling and admin expense

  7. Net operating income (loss) - variable costing
• Reconciliation of net income between variable and absorption costing

  1. Net income - variable costing

  2. Add: Fixed cost in ending inventory

  3. Less: Fixed cost in beginning inventory

  4. Net income - absorption costing
• Production and sales relationship


  • P = S, AC = VC, BE = BB
  • P > S, AC > VC, BE > BB
  • P < S, AC < VC, BE < BB