The difference between absorption and variable costing is due solely to moving fixed costs into inventories as inventories cost decrease increase and out of inventories as they include the variable costs directly incurred in production.
Variable cost accounting is a cost concept for business management. This method incurs manufacturing overhead during the period of manufacturing the product. This solves the problem of absorption costing and increases revenue as production increases. The absorption cost method allows managers to defer costs to the next period in which the product is sold.
This artificially inflates the profit over the production period as it incurs fewer costs than in a variable cost system. Variable costs are generally not used for external reporting purposes. Under the Tax Reform Act of 1986, the income statement must use absorption cost accounting to comply with its GAAP.
Variable costing is a costing method that includes only variable manufacturing costs (direct material costs, direct labor costs, and variable manufacturing overhead costs) in the unit price of a product.
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