Absorption Costing versus Variable Costing Essay

Absorption Costing versus Variable Costing - Essay ExampleAdopting absorption costing and variable costing by a firm is not considered mandatory however. They are essentially peckerwoods for the management to assess profitability.Absorption costing broadly refers to the manufacturing costs which get absorbed by a unit of product that is manufactured (Garrison, Noreen and Brewer, 2003). Absorption costs include raw material costs, labour costs, fixed and variable manufacturing expenses. The absorption costing remains includes taking into consideration all types of fixed and variable costs and allocating the aforesaid(prenominal) under different heads and accordingly estimating the overall costs of the product (Garrison, Noreen and Brewer, 2003). A product, in the course of its manufacturing may absorb a number of different types of costs. As per the regulations of GAAP (Generally Accepted Accounting Priniciples), it is essential that the firm recognizes the value of its inventory o n the basis of absorption costing (Garrison, Noreen and Brewer, 2003). However these costs are not recognized till the firm sells the goods and revenues are earned. They are not recognized when an entity makes defrayal for the same and therefore remains in the inventory cost as an asset (Garrison, Noreen and Brewer, 2003).Variable costing is considered to be suitable a management tool for assessing efficiency. It is often used as an alternative for absorption costing. GAAP does not allow the usage of variable costing for estimating the cost of production. However, managers are seen to use the same for assessing internal operations affectivity. The variable costing technique includes only the variable production costs. Fixed manufacturing expenses under this method are treated as finale cost and are deducted from the income earned during the period (Hilton, 1994).Absorption costing is seen to be useful when all manufactured