Absorption and Variable Costing

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Introduction

Definition of Absorption and variable costing

In the field of accounting, variable costing which is also referred to as direct costing and absorption which entails full costing are two different terms as long as production in the IBM manufacturing company is concerned. They are two dissimilar methods that are used during the application of production costs to services or products (Narasimhan, 2017). The major difference between the two methods appears in the cases of treating fixed overhead costs for manufacturing. Variable costing involves all the fixed manufacturing overhead costs expensed within the period they incurred whereas, absorption costing method involves all the fixed overhead costs for manufacturing being expensed in the IBM selling its products (Terzioglu & Chan, 2013).

Variable cost system is applicable where there are direct costs and a variable Manufacturing overhead costs that are set for the products at the end. These are costs that move with the product that IBM Company is manufacturing via the accounts of inventory up to time the product will be marketed and sold (Terzioglu & Chan, 2013). These costs are expensed on the IBM’s company statements of income as real costs of goods being sold by the company (Narasimhan, 2017). On the other hand, there are fixed manufacturing costs of overhead that are accounted to be expensed for the period they incurred. Variable costing in some cases are known as Marginal Costing.

Absorption costing method in the case of IBM Company applies in situations where there are fixed, variable and all direct costs overheads are involved for manufacturing to end product the company is dealing with. All the above costs are supposed to move with engineering product the IBM Company is manufacturing via all inventory accounts of company till the time the product will be sold (Terzioglu & Chan, 2013). At this point of selling the product, all the cost is expensed on the statements of income as the cost of the products being sold by IBM Company. It is the responsibility of the financial leader of IMB Manufacturing Company to add value to the product. In the process of adding the value, there are several criteria to be followed. Firstly, management of the costs should be commencing as soon as possible as well as reduction of costs on the way to add the value to product. Almost all the successful companies in the world including the IBM Manufacturing Company have incorporated into use of the two costing methods of variable and absorption costing (Narasimhan, 2017).

Absorption costing and variable costing in the IBM Manufacturing Company cannot be substituted for one another due to the fact that both systems have own limitations and own benefits.

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