Answer
The essential difference between variable costing and absorption costing, is how each method accounts for fixed manufacturing overhead costs - all other costs are treated the same under the two methods. In absorption costing, fixed manufacturing overhead costs are included as part of the costs of work in process inventories. When units are completed, these costs are transferred to finished goods and only when the units are sold do these costs flow through to the income statement as part of cost of goods sold. In variable costing, fixed manufacturing overhead costs are considered to be period costs- just like selling and administrative costs, and are taken immediately to the income statement as period expenses
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