Variable and Absorption Cost Methodologies

Variable costing method 

In the methodology, the variable costs are the only costs that are assigned to the inventory. Therefore, meaning that only the overheads are determined as the expense whenever a period is considered. The remains direct materials and variables are attached to the stock. The methodology is only applied as an internal reporting tool. To use the method, there is a need to first classify the cost as either fixed or variable. The variable price as in production includes the cost of raw materials, packaging, wages for workers, and other varying costs incurred in the process of creation (Lepadatu, 2013). Then add all the listed variable costs for the particular period. It is merely the unit variable cost produced. 

Absorption Costing Method 

This process, unlike the variable cost method, apportions the accumulated costs of individual products according to how they are associated with the production process. It is recommended by the accounting g standards because it is vital in creating value in the inventory as per an organization balance sheet. When a product during the production process absorbs costs both fixed and variable, they may not be recognized as expenses when the entity pays for them. Instead, they remain in the inventory as an asset until the eventual sale of the stock (Horngren et al., 2002). Therefore, charged as part of the cost of goods sold. It also makes it easier to apply activity-based costs for the allocation of overhead costs in the inventory. It is time-consuming, but it is but recommended by the generally accepted accounting principles (GAAP). 

To calculate one need to assign cost to cost pools, which is a standard to set that must be added to the cost pools and which do not change. Then usage is calculated by assigning the overhead costs such as direct labor and machine hours. Finally, one assign expenses by dividing the usage measure of the total costs to obtain the rate of allocation of the unit and also attach to produce goods an overhead cost based on the usage rate. 

If 10000 units are produced. 

References  

Horngren, C. T., Bhimani, A., Datar, S. M., Foster, G., & Horngren, C. T. (2002).  Management and cost accounting . Harlow: Financial Times/Prentice Hall. 

Lepadatu, G. V. (2013). Variable costs method (direct-costing) and its application area.  Metalurgia International ,  18 (1), 85.