Hi, Can anyone give me the difference between Variable costing and Full Absorption costing. And what are their functions in accounting??
Variable costs are costs that vary with the level of activity i.e. if the cost element changes whenever you increase production such as electricity charges. Variable costing is therefore the costing of the expenses of a business based purely on the inclusion of only expenses that vary with the level of activity. Other fixed costs(which do not vary with the level of activity) are excluded. It is usually used for decision taking purposes as in the short run, you are only required to cover your variable costs to be deemed to be doing a worthwhile business. Full absorption costing on the other hand incorporates all costs of the business, both variable and fixed costs and is usually used in the long run to determine the profitability of a business as in the long run every business must cover its total costs(both variable and fixed) to be deemed profitable and to remain in business.