Costing Vs Variable Costing

A typical income statement is in report form. It is also referred to as statement of income and expenses or statement of profit or loss. Absorption and variable costing are two different costing approaches used in preparation of income statements. A huge number of worlds’ successful companies use both approaches. Both costing approaches are known by various terminologies by different entrepreneurs. For instance, variable costing is also referred to as direct costing or marginal costing and absorption costing is also known as full costing or traditional costing. Absorption costing and variable costing cannot be substituted for each other because both systems have their own benefits and limitations. The valuable information presented by variable

The variable product costs include all variable manufacturing costs, which include raw materials, labor, and variable manufacturing overheads. These costs are subtracted from the sales to yield the variable manufacturing margin. Some of the costs also vary with sales and as a result, the amounts must be subtracted to give the actual contribution margin. Management must take into account all variable in making critical decisions. For instance, a company may pay sales commissions based on its sales to exclude them from consideration in evaluating the margin but may also result in incorrect figures.

Differences between absorption and variable costing in income statements

A major difference is in the manner of their presentation. To be precise, the arrows informing how amounts appear in the absorption costing approach would be repositioned in the variable costing income statement. Since the most of the entries are the same under both approaches, the gross profits accrued are not the same as contribution margin, and therefore decision logic is often driven by consideration of variation effects. In addition, fluctuation in the inventory levels causes the periodic income to differ significantly between the two

The startup costs are identified, helping the company to determine the sales revenue needed to pay ongoing business expenses. Breakeven point is calculated by identifying all the company’s fixed as well as variable costs. According to Martin (N.d) fixed costs are the expenses that do not change with sales; they include rent and salaries. Such expenses must be incurred regardless of sales volume made. Variable costs change directly with sales volume, such as purchases inventory, shipping costs, and product manufacturing costs. For example, a business with break-even analysis showing that 100 units are needed to be for it to break from loss to profitability the managers are required to assess whether or not they will be able to sell the 100 units within a set period of time considering the market situation. Entrepreneurial expectations and financial situation of the business are major factors of consideration. In case a decision to lower the prices is arrived in order to sell off the 100 units, break-even point should be re-calculated factoring in the