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Reported operating income figures using variable costing or absorption costing will differ if there is any change in the level of inventory in the period. If production is equal to sales, there will no no difference in calculated profits using these costing methods.
Under absorption costing system, the product cost consists of all variable as well as all fixed manufacturing costs i.e., direct materials, direct labor and factory overhead (FOH). But when variable costing system is used, the fixed cost (both manufacturing and non-manufacturing) is treated as a period or capacity cost and is, therefore, not included in the product cost.
Following exhibition summarizes the difference between variable costing and absorption costing:
Variable versus absorption costing
