Q1CA - Horngren'S Financial And Managerial Accounting

Question

Question: Communication Activity 21-1 

In 100 words or fewer, explain the main differences and similarities between variable costing and absorption costing.

Step-by-Step Solution

Answer

Answer

 

The main dissimilarity between variable and absorption costing is that one method considers the fixed manufacturing overhead, and the other is not.

Step 1: Meaning of Variable Costing

Variable costing is a cost accounting technique that only considers the variable manufacturing overheads while calculating the cost of a product.

 

Step 2: Main differences between variable costing and absorption costing

In absorption costing, all the manufacturing costs are charged to the cost of the product. While in variable costing, only direct costs incurred being the part of the cost of the product.  

 

Absorption costing focuses on giving results of gross profit. Variable costing calculates the contribution margin.

Step 3: Similarities between variable costing and absorption costing

Variable and absorption costing techniques both help in calculating operating income. Both methods include material and labor costs as a direct cost.