CONCEPTUAL MAP ON ABSORPTION and VARIABLE COSTING

Submitted to:

Prof. Lord Eddie I. Aguilar, CPA

College of Accounting Education
University of Mindanao

In Partial Fulfillment
Of the Requirements in Strategic Cost Management (ACC 213)

SHEILA MAE BENEDICTO

BE 308: 2:30-3:30
0925

October 23, 2019

Absorption Costing is generally used for the purpose of
making external financial reporting. This costing approach is
under the traditional costing method. “It classifies cost
based on their functions”, which means regardless of
whether the costs of production are variable or fixed it is
treated as product costs. Thus, the cost per unit of a product
under this method consists of direct materials, direct labor
and variable and fixed overhead. Along with variable
manufacturing cost, under absorption costing a portion of
fixed manufacturing overhead costs is allocated to each unit
of product. Treating all costs of production as product costs
is the reason why it is frequently referred to as Full Cost
Method (Frost, n.d.).
The photo was retrieved from:
https://www.principlesofaccounting.com/chapte
r-23/variable-costing/
Under the Absorption Costing Method, all production costs
such as the variable and fixed costs are included in
determining the unit product costs. Thus, under this method if
the company sells a unit of product then the variable and
fixed costs will be deducted on the profit and loss account as
an element of cost of goods sold.
Opponents of absorption costing argue that under this
method there is a possibility that faulty decisions may happen
especially fixed manufacturing overhead costs are shift
between period (Frost, n.d.).
Variable Costing is often utilized for internal decision
making. This costing method is used particularly in
contribution format income statement. It classifies costs
based on their behavior when activity level changes:
variable and fixed costs. Under the variable costing, the
costs that are treated as product costs are those costs that
vary with output. These are the direct materials, direct
labor and the variable portion of manufacturing
overhead. Fixed manufacturing overhead costs are not
treated as product cost but rather as period cost and, like
selling and administrative costs, it is charged off entirely
against the revenue earned for the period. Furthermore, cost
of goods sold under the variable costing contains even no
single element of fixed overhead cost. This is the reason why
it is sometimes referred to as Direct Costing or Marginal
Costing (Frost, n.d.).
The photo was retrieved from:
https://www.principlesofaccounting.com/chapte
r-23/variable-costing/
Based from the picture above income is higher under absorption
costing. This is consistent with the guideline mentioned in general
rule of thumb: Increases in inventory will eventually cause income to
be higher under absorption costing than under variable costing, and
vice versa. (Frost, n.d.)
Under the Variable Costing Method, only variable costs are
included in product costs. Thus, under this method if the
company sells a unit of product only the variable cost will be
deducted as an element of cost of goods sold, and unsold
units will be carried as inventory.
Opponents of variable costing argue that under this method
income statements are easier to understand because the net
operating income is the only element affected by changes in
unit sales. This probably produces a net operating income
figures that are consistent enough to the manager’s
expectations (Frost, n.d.).
REFERENCES:

Frost,J.(n.d.). Chapter 7. Variable - Costing Tool for Management Learning Objectives Chapter Overview. Retrieved from:

Chapter_7_Variable_Costing_A_Tool_for_Management_Learning_Objectives_Chapter_Overview.

Principles of Accounting.com. (n.d.). Variable versus Absorption Costing. Retrieved from: https://www.principlesofaccounting.com/chapter-23/variable-costing/