What are the differences between a company using absorption costing and variable costing when they give managers a bonus for meeting an annual income target?
What are the differences between a company using absorption costing and variable costing when they give managers a bonus for meeting an annual income target?
Absorption Costing : It is one of the methods of calculation of product costs. Under this method, the fixed manufacturing overheads are also considered as part of the product cost with direct costs. The unit product cost includes direct material, direct labor and variable overhead and allocated amount of fixed overhead. Under this method, the income statement calculates Gross Margin and net operating Income.
Variable Costing : It is the costing which includes all types of variable cost. It is an accounting method used to allocate production to its cost and it is done during the period.
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