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Summary Variable Costing and Absorption Costing
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Summary notes of Variable Costing and Absorption Costing and Examples to exercise and understand.
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VARIABLE ANDABSORPTION COSTING
, VARIABLE COSTING
Also referred to as direct / marginal costing.
Used for management accounts and decision
making purposes.
Only variable production costs are included in the
cost of inventory.
Actual fixed production overheads are written off as period costs in
the year in which they are incurred.
ABSORPTION COSTING
•Used for external reporting purposes – compliance with
IAS 2.
•Variable and fixed production costs are included in the
cost of inventory.
IAS 2 – ABSORPTION COSTING
The allocation of fixed production overheads to the costs of conversion is based on
normal capacity.
Normal capacity is the production expected to be achieved on average over a number
of periods or seasons under normal circumstances (the actual level of production may
be used if it approximates normal capacity) taking into account the loss resulting from
planned maintenance. In questions if normal capacity is not given you can just use the
budget.
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