See Also:
Absorption vs variable costing Advantages and Disadvantages
Variable vs Fixed Cost
Semi Variable Costs
Activity Based Costing vs Traditional Costing
Absorption Cost AccountingAbsorption vs Variable Costing Meaning
In the field of accounting, variable (direct) costing and absorption (full) costing are two different methods of applying production costs to products or services. The difference between the two methods is in the treatment of fixed manufacturing
overhead costs. Under the direct costing method, fixed manufacturing overhead costs are expensed during the period in which they are incurred. Under the full costing method, fixed manufacturing overhead costs are expensed when the product is sold.
Direct Costing System
The direct costing method applies all direct costs as well as variable manufacturing overhead costs to the end product. These costs move with the product through the inventory accounts until the product is sold, at which point they are expensed on the
income statement as costs of goods sold. Fixed manufacturing overhead costs are expensed during the period in which they are incurred.
Direct costing is also called
variable costing or marginal costing.
Full Costing Method
The full costing method applies all direct costs and both fixed and variable manufacturing overhead costs to the end product. All of these costs move with the product through the inventory accounts until the product is sold, at which point they are expensed on the income statement as costs of goods sold.
Full costing is also called absorption costing.