Page 3 - PowerPoint Presentation
P. 3
VARIABLE AND ABSORPTION COSTING
Direct / variable /
marginal costing: Absorption costing:
Direct/ variable costing is mainly used for Absorption costing is used mainly for external
presenting cost data to management. reporting purposes – as per IAS 2.
Only variable production overheads are
included in the cost of inventory. Variable and fixed production overheads are
included in the cost of inventory.
Actual fixed production overheads are written Therefore fixed overheads are deferred to the
off as period costs in the year in which they are next year (carried forward in closing stock) –
incurred. closing stock is inflated and therefore profits
are inflated for decision making purposes.
This enables management to make more
efficient decisions concerning aspects such as
expansion or reduction of output.
Variable costing also gives a clearer picture for
the evaluation of the performance of divisions
and for certain short term decision making 3
scenarios.
