Absorption vs Variable Costing

In: Business and Management

Submitted By ja863
Words 4183
Pages 17
Group Case Project: Absorption Costing vs. Variable Costing

Javkhlantugs Altansukh

Ana Barrios

Cameron R. Bates

Kyle Brown

Absorption Costing Absorption costing is a costing system in which the direct labor, direct materials, and fixed and variable manufacturing overhead costs are traced to every finished product. Thus, in the absorption costing system, all costs are product costs regardless of their classification of variable or fixed. Because of its characteristic of no cost discrimination, absorption costing is also known as full costing or as full absorption method (¨Absorption¨ 1). The absorption costing is the only method approved by the generally accepted accounting matching principle (GAAP). Thus, it is required by law to use this system for external financial statements (Lohrey 1). The absorption costing also provides accuracy of the calculation in taxes reporting (1). Experts say that the absorption costing method provides a complete picture of cost calculation and it is helpful to accurately track profit during an accounting period (Cunagin 1). In fact, this method is in compliance with the GAA matching principle which states that all expenses and revenues must be reported in the same period (Lohrey 1).
Production Process
A simplified production process starts with the purchase of direct materials and ends with the sale of the finished goods. To account this process the following steps should be made. When the direct materials are purchased, they are recorded as assets. When the direct materials are placed into production, the costs are recorded in a work-in-process account which is also an asset (1). In the manufacturing, as direct labor is incurred, they are transferred to the work in process account. Similarly, the overhead costs are transferred to this account. When the goods are finished and ready for sale, they are transferred…...

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