The Complete CFO Handbook

Chapter 25. Direct and Absorption Costing

Agenda

Item 1	Determine the cost of manufactured products using either direct or absorption costing.
Item 2	Compare the use of direct costing and absorption costing in the cost of goods manufactured statement, income statement, and balance sheet.
Item 3	Identify the principal advantages of direct costing with respect to operations planning, cost‐volume‐profit analysis, break‐even analysis, management decision making, product pricing, and management control.
Item 4	Identify the principal disadvantages of direct costing such as its restriction from use in external financial statements and the difficulty of accurately separating costs into their variable and fixed components.

The cost of manufactured products is generally based on either absorption costing (the full costing concept) or direct costing (the variable costing concept). In the preceding chapters absorption costing has been presented in detail, since it is more widely used than direct costing. In this chapter, the concept of direct costing will be Defined and illustrated. In addition, the advantages and disadvantages will be discussed, and a comparison of direct costing with absorption costing is included.

Meaning of Direct Costing

Under absorption costing, sometimes called full costing or conventional costing, all factory overhead costs, both variable and fixed, are treated as product costs. Under direct costing, only factory overhead costs that vary with volume are charged to products. That ...