Absorption and Variable Costing,
Absorption and Variable Costing, Inventory Management
Absorption and Variable costing are very important tools for cost accounting. Both of these costing methods allow you to see the cost of your inventory, in a different way. For example the absorption method allows you to assign all costs to the product, while variable costing allows only variable costs to be assigned to the product. Inventory management is extremely important as well because it ties into efficiency and lowering your costs so that your company can be as profitable as it can in operations. Throughout this paper I will discuss the importance of both costing methods, how it is implemented as well as using the income statement for costing. Most companies don’t necessarily look at the costs of all departments; they break down the departments into separate entity’s called profit centers. The companies do this because by breaking down each department they can see if there are any problem areas that they should correct, involving the performance of the individual profit centers. To look at the overall company’s performance, most people find it useful to look at the income statement. However, this income statement is of little use for determining the viability of the individual business units or segments. Instead, it is important to develop a segmented income statement for each profit center. That is why these two costing methods have been developed. One of them is based on variable costing and the other is based on absorption costing. They are costing methods because they refer to the way in which product costs are determined. Product costs are inventoried; and they include direct materials, direct labor and overhead. Period costs are expensed in the period they are incurred. These are usually selling and administrative expenses or other expenses to run your company day to day. The one difference between the two costing systems is fixed factory overhead. Absorption costing is a
Absorption and Variable costing are very important tools for cost accounting. Both of these costing methods allow you to see the cost of your inventory, in a different way. For example the absorption method allows you to assign all costs to the product, while variable costing allows only variable costs to be assigned to the product. Inventory management is extremely important as well because it ties into efficiency and lowering your costs so that your company can be as profitable as it can in operations. Throughout this paper I will discuss the importance of both costing methods, how it is implemented as well as using the income statement for costing. Most companies don’t necessarily look at the costs of all departments; they break down the departments into separate entity’s called profit centers. The companies do this because by breaking down each department they can see if there are any problem areas that they should correct, involving the performance of the individual profit centers. To look at the overall company’s performance, most people find it useful to look at the income statement. However, this income statement is of little use for determining the viability of the individual business units or segments. Instead, it is important to develop a segmented income statement for each profit center. That is why these two costing methods have been developed. One of them is based on variable costing and the other is based on absorption costing. They are costing methods because they refer to the way in which product costs are determined. Product costs are inventoried; and they include direct materials, direct labor and overhead. Period costs are expensed in the period they are incurred. These are usually selling and administrative expenses or other expenses to run your company day to day. The one difference between the two costing systems is fixed factory overhead. Absorption costing is a