TOPIC FOCUS ONVARIABLE AND ABSORPTION COSTING

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WHAT IS VARIABLE COSTING?

► Product costing approach that includes only variable costs• Direct materials• Direct labor• Variable overhead

► Fixed overhead is not considered a product cost but is treated as a period cost and expensed as incurred

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COMPARISON

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JERSEY FABRIC PRODUCT COSTS

Absorption Costing Variable CostingDirect Materials $1.26 $1.26Direct Labor 0.54 0.54Variable Overhead 0.30 0.30Fixed Overhead 1.50 Total cost per yard $3.60 $2.10

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UNITS SOLD = UNITS PRODUCED

Absorption Costing Variable Costing

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UNITS SOLD < UNITS PRODUCED

Absorption Costing Variable Costing

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UNITS SOLD > UNITS PRODUCED

Absorption Costing Variable Costing

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EFFECTS ON OPERATING INCOME