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Unformatted text preview: Dr.Kiani VARIABLE COSTING AND ABSORPTION COSTING Acct.230 MEANING OF VARAIBLE (DIRECT) COSTING Under absorption ( full or conventional ) costing, all factory overhead costs, both fixed and variable are treated as product costs. Financial accounting is prepared according to absorption costing principle which follows GAAP. Therefore, the product costs (the cost of manufactured products ) which are included in inventory consist of: • direct materials, • direct labor, • variable factory overhead, • fixed factory over head . Under variable costing , only manufacturing costs that vary with volume are charged to products. That is, only the costs of: • direct materials, • direct labors, and • Variable factory overhead. The concept of variable costing considers only direct materials, direct labor, and variable factory overhead to be product costs, that is fixed over head is not included in inventory. The concept of variable costing considers fixed factory overhead to be a period cost. Under variable costing , fixed costs are differentiated from variable costs not only in internal reporting but in the various cost accounts as well.not only in internal reporting but in the various cost accounts as well....
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