All About Accounting

ABSORPTION COSTING

• costing method that includes all manufacturing costs - direct materials, direct labor and fixed factory overhead (FFOH) in the cost of a unit of products.
• treat FFOH as a product cost. It supports Matching Principle and is acceptable for financial reporting and tax purposes.
• inventories is ALWAYS HIGHER than Variable Costing.
• FS Presentation:

               Sales
               -COGS
               Gross Profit
              - Expenses
              Net Income



VARIABLE COSTING

• also called DIRECT COSTING, includes only variable manufacturing costs - direct materials, direct labor and variable manufacturing/factory overhead (VFOH).
• treat FFOH as Period Cost. It violates Matching Principle.
• FS Presentation:

          Sales
          -Variable Cost
          Contribution Margin
          -Fixed Cost
            Profit