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Discuss: Although variable costing is more relevant for management decision- making, absorption costing still a popular technique used in practice
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Discuss: Although variable costing is more relevant for management decision- making, absorption costing still a popular technique used in practice Introduction There are two approaches to calculate cost: absorption costing and variable costing. Absorption costing refers to a system in which all the fixed manufacturing overheads are allocated to products. (Drury, 1996) It means that cost of a product rests on the fixed overhead, so they can be included in stock valuation. Alternatively, variable costing assigns only variable manufacturing costs to products. (Drury, 1996) Under this system, the cost of fixed overhead is charged in the period when they happen. In other words, it takes the fixed as a constant. Obviously, the key difference between the two methods is fixed overhead. Variable costing ignores the fixed overhead and treats it as nothing to do with the cost, whereas absorption costing divides the fixed overhead into every concrete product and considers overhead as a...
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