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Absorption Costing Profit vs Variable Costing Profit
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This video summarizes the ways in which operating profit (or loss) differs based on whether Absorption Costing or Variable Costing is used.
If the company produces more units than it sells, then operating profit will be higher under Absorption Costing (compared to Variable Costing). This is because inventory increases and, with Absorption Costing, some of the fixed manufacturing overhead is deferred to a future period (this reduces expenses and thereby increases operating profit in the current period).
If the company produces fewer units than it sells, then operating profit will be lower under Absorption Costing (compared to Variable Costing). This is because inventory decreases, and under Absorption Costing, some of the fixed manufacturing overhead that had been deferred from prior periods is expensed in the current period (this increases expenses and thereby reduces operating profit).
If the number of units produced is equal to the number of units sold, operating profit will be the same whether Absorption Costing or Variable Costing is used.
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HIRE MICHAEL MCLAUGHLIN, PHD, CPA
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If the company produces more units than it sells, then operating profit will be higher under Absorption Costing (compared to Variable Costing). This is because inventory increases and, with Absorption Costing, some of the fixed manufacturing overhead is deferred to a future period (this reduces expenses and thereby increases operating profit in the current period).
If the company produces fewer units than it sells, then operating profit will be lower under Absorption Costing (compared to Variable Costing). This is because inventory decreases, and under Absorption Costing, some of the fixed manufacturing overhead that had been deferred from prior periods is expensed in the current period (this increases expenses and thereby reduces operating profit).
If the number of units produced is equal to the number of units sold, operating profit will be the same whether Absorption Costing or Variable Costing is used.
—
Edspira is the creation of Michael McLaughlin, an award-winning professor who went from teenage homelessness to a PhD. Edspira’s mission is to make a high-quality business education accessible to all people.
—
SUBSCRIBE FOR A FREE 53-PAGE GUIDE TO THE FINANCIAL STATEMENTS, PLUS:
• A 23-PAGE GUIDE TO MANAGERIAL ACCOUNTING
• A 44-PAGE GUIDE TO U.S. TAXATION
• A 75-PAGE GUIDE TO FINANCIAL STATEMENT ANALYSIS
• MANY MORE FREE PDF GUIDES
—
HIRE MICHAEL MCLAUGHLIN, PHD, CPA
—
GET CERTIFIED IN FINANCIAL STATEMENT ANALYSIS, IFRS 16, AND ASSET-LIABILITY MANAGEMENT
—
LISTEN TO THE SCHEME PODCAST
—
GET TAX TIPS ON TIKTOK
—
ACCESS INDEX OF VIDEOS
—
CONNECT WITH EDSPIRA
—
CONNECT WITH MICHAEL
—
ABOUT EDSPIRA AND ITS CREATOR
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