Variable and Fixed Costs



Variable and Fixed Costs

Answer - 1

Absorption Costing

A method of inventory costing in which all direct production costs and all indirect manufacturing costs both fixed and variable costs are considered absorption income statement, thus considering the fixed manufacturing overhead cost as Product (Warren, 2013).

Contribution

Contribution income statement shows variable cost only. The contribution is the difference between net operating income and variable costs and expenses incurred for their production, while gross margin is the difference between that income and fixed costs and variable, both banks are used for making decisions.

Usually senior management and finance departments of companies handled internally deeper contribution margin globally and by line of business or functional units, off the books must be classified into fixed and variable costs, operating expenses and sales management.

The difference between the both

The differences between the two costing methods focus on the accounting treatment given to the fixed costs of production. To determine the cost of production, absorption costing considers the direct materials, direct labor and manufacturing overhead costs, regardless of whether such items have fixed characteristics or variables in relation to the volume of production. Thus the advocates of this approach argue that production can not be realized without incurring fixed manufacturing overhead costs.

The contribution margin (revenues - variable costs - variable costs) calculated monthly and accumulated by business line is an essential tool for financially know what is the functional unit that absorbs a higher share value of costs and overheads, as shown in the following table:

Item

Concepts

Line 1

Line 2

Line 3  

A

Net operating revenues

1,000,000

50,000,000

100,000,000

B

Variable costs

400,000

20,000,000

60,000,000

C

Variable Expenses

100,000

10,000,000

20,000,000

D

Contribution Margin (A - B - C)

500,000

20,000,000

20,000,000

E

Contribution rate (D / A)

50%

40%

20%

As you can ...