Describe the Basic Differences Between Absorption and Variable Costing

question 87

Essay

Describe the basic differences between absorption and variable costing.Why are managers sometimes motivated to produce too much inventory when income is computed under an absorption costing system?

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Definitions:

Total Variable Costs

The overall expenses that change in proportion to the activity of a business, such as production volume or units of service delivered.

Total Fixed Costs

The sum of all costs that remain constant regardless of the level of production or output within a specific period.

Total Variable Costs

The sum of all costs that vary directly with the level of production or output, excluding fixed costs.

Total Costs

Total costs encompass the sum of all expenses incurred by a business in the production and sale of goods or services.