500px, An example of an income statement using variable and absorption costing
Variable costing is a
managerial accounting
In management accounting or managerial accounting, managers use accounting information in decision-making and to assist in the management and performance of their control functions.
Definition
One simple definition of management accounting is t ...
cost concept. Under this method,
manufacturing overhead is incurred in the period that a product is produced. This addresses the issue of
absorption costing
Total absorption costing (TAC) is a method of Accounting cost which entails the full cost of manufacturing or providing a service. TAC includes not just the costs of materials and labour, but also of all manufacturing overheads (whether ‘fixed†...
that allows
income
Income is the consumption and saving opportunity gained by an entity within a specified timeframe, which is generally expressed in monetary terms. Income is difficult to define conceptually and the definition may be different across fields. Fo ...
to rise as
production
Production may refer to:
Economics and business
* Production (economics)
* Production, the act of manufacturing goods
* Production, in the outline of industrial organization, the act of making products (goods and services)
* Production as a stati ...
rises. Under an absorption cost method, management can push forward costs to the next period when products are sold. This artificially inflates profits in the period of production by incurring less cost than would be incurred under a variable costing system. Variable costing is generally not used for external reporting purposes. Under the
Tax Reform Act of 1986
The Tax Reform Act of 1986 (TRA) was passed by the 99th United States Congress and signed into law by President Ronald Reagan on October 22, 1986.
The Tax Reform Act of 1986 was the top domestic priority of President Reagan's second term. The ...
,
income statement
An income statement or profit and loss accountProfessional English in Use - Finance, Cambridge University Press, p. 10 (also referred to as a ''profit and loss statement'' (P&L), ''statement of profit or loss'', ''revenue statement'', ''stateme ...
s must use absorption costing to comply with
GAAP
Gaap (also ''Tap'', ''Coap'', ''Taob'', ''Goap'') is a demon that is described in demonological grimoires such as ''the Lesser Key of Solomon'', Johann Weyer's ''Pseudomonarchia Daemonum'', and the Munich Manual of Demonic Magic, as well as Jacq ...
.
Variable costing is a costing method that includes only variable manufacturing costs—direct materials, direct labor, and variable manufacturing overhead—in unit product costs.
[Managerial Accounting: Ray H. Garrison, Eric W. Noreen, Peter C. Brewer, 14th edition, 2012]
References
{{reflist
*Managerial Accounting: Ray H. Garrison, Eric W. Noreen, Peter C. Brewer, 14th edition, 2012
Costs
*
Corporate development
