Capsul Tube
Thursday, November 4, 2010
Income reported under variable costing and absorption costing are different. It is only the different value of inventory under the two costing income statements that changes the amount of the net income. Except the value of inventory, we do not find any other differences. As the size of inventory increases or decreases during the year, the reported income differs under variable and absorption costing. This results from the fixed overheads that are included in the inventory valuation under absorption costing but are expended immediately under variable costing. Under absorption costing this period's factory overheads are postponed to the next year whereas under variable costing it is expended during the same year.
Difference in net income
= (Change in the size of inventory units) x (Difference in product cost per unit)
The difference in net income is the same as the difference in the size of inventory value. So with a change in the size of inventory, profit also change.
