Accounting › Section S · Activity-based, variable, and absorption costing › Topic S.4
Variable versus absorption costing
Should fixed factory overhead be part of what a product costs, or a cost of the period? Absorption costing says the first and is required for external reports; variable costing says the second and is often preferred by managers. When inventory changes, the two report different profits.
In this topic
- Two ways to cost a unit
- Worked example: Glenridge's unit costs and first year
- Two income statement formats
- The reconciliation rule
- Worked example: Glenridge's second year
- Effects on the balance sheet
- Producing for inventory
- Why managers like variable costing
- Why absorption costing is required
- Common mistakes to avoid
- Key takeaways
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