Absorption vs variable costing Advantages and Disadvantages • The Strategic CFO

Abstract

Variable costing may provide a clearer picture of the actual incremental costs associated with a specific product. Essentially, the variable costing method can give producers and those concerned with financial records an accurate representation of what actually goes into the costs of producing. Proponents of variable costing argue that fixed manufacturing overhead costs are incurred regardless of production volume and therefore should not be considered in product-related decision-making. Therefore, variable costing method users can enjoy a reported cost that is representative of the actual inputs to the products. However, by ignoring fixed manufacturing overhead costs, variable costing may understate a product’s overall cost. The manufacturing overhead is important because, though the costs included in overhead do not contribute directly to the creation of the product, there is still some residual effect on the production which drives up the cost to produce.