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Difference between variable cost and absorption costing method

Absorption costing Variable costing

1 . Absorption costing is the costing method 1. Variable costing is the costing method
that includes both variable that includes only variable manufacturing
manufacturing and fixed manufacturing overhead - direct raw material, direct
overhead directly as the products costs. It labor and variable factory overhead.
includes direct new material , direct
labor and both variable and fixed
manufacturing overhead

2. Its another name is full cost. 2. It's another name is direct cost.
3. Ending inventory is higher.
3. Ending inventory is lower than the
absorption costing method.
4. Fixed manufacturing cost is treated as 4. Fixed manufacturing cost is treated
product cost. as period.

Over applied:
A credit balance of the manufacturing overhead account that occur.
When the amount of overhead cost applied to work in process in greater
than the amount of overhead cost actually incurred during a period.

Under applied:
A debit balance of the manufacturing overhead account that occurs
when the amount of overhead cost applied to work in process in lower than
the amount of overhead cost actually incurred during a period.
cise (3-3)

Company

t labor - hours A B c
ine - hours
60000 30000 40000

"material cost 25000 90000 18000


facturing overhead $ 300000 160000 240000
432000 270000 384000

termine overhead rates are computed by using the following cost drives-

Company cost driver

A Direct labor hours

B Machine hours

C Raw material
Required -
(a) Compute predetermines overhead rates for A, B, C companies.
(b) Company produce product in caring 7000 direct labor. What is the overhead cost for
company A. What would the condition of overhead applied or under applied if the
actual overhead cost =$430000?

Solution:

a) For company A

Estimated total manufacturing cost


POR=
Estimated total allocation base =
432000 60000
= 7.2

For company B

Estimated total manufacturing cost


POR= ___________________________
Estimated total allocation base =
270000 90000
-)
>r company C

Estimated total manufacturing cost


POR= ____________________________
Estimated total allocation base = $384000
240000 = 1.6 =
160%

>mpany A =7.2 per direct labor hours


B =3 per machine hours
C =160% raw materials

(b) Total manufacturing overhead applied


$(70000*7.2) $504000
Actual cost ______ 430000

$740000