The primary difference is that the absorption cost method includes fixed overhead as part of the cost of goods sold, while the variable cost method includes it as an administrative cost.
Difference between the absorption cost method and the variable cost method:
- Absorption costing, often known as "full costing," is a managerial accounting method for collecting all costs related to the production of a specific product.
- This strategy accounts for direct and indirect expenditures such as direct materials, direct labor, rent, and insurance.
- Variable costing is a concept used in managerial and cost accounting that excludes fixed manufacturing overhead from the product cost of production.
- In contrast, absorption costing allocates the fixed manufacturing overhead to the items produced.
- The major distinction is that the absorption cost technique includes fixed overhead as part of the cost of products sold, whereas the variable cost method includes it as an administrative cost.
Therefore, the primary difference is that the absorption cost method includes fixed overhead as part of the cost of goods sold, while the variable cost method includes it as an administrative cost.
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