Variable Costing - Essay Example

Product cost versus period cost Also known as inventorial costs, product costs are all those costs that are used in the acquisition and production of a product. They include direct labor costs, cost of direct materials and the manufacturing expenditure (Maher et, al 2006). They are normally assigned to an inventory account in the balance sheets and released from the stock as expenditure. Period costs are all the omissions in the product cost normally expensed on the income statement or report in the time of occurrence for example the office rent, administrative expenses and commissions on sale, which are expensed on the income statement during such periods of occurrence (Maher et, al 2006). . The fixed manufacturing expenditure is incurred with the hope that the capital represented by these costs will be consumed in the manufacture of stock.

Therefore these costs should correspond or rather be matched against the income attributed to the sale of such stock. Absorption cost needs the computation of expenditure rate for applying all the production expenses to the units that are produced during that period or else twin expenditure rates for variable manufacturing and fixed manufacturing overheads or multiple overhead rates in case the company uses the activity based costing (Hansen, et, al 2006). In variable costing, the validation is that the fixed manufacturing overhead shall be incurred in the short (er) term with no emphasis of the quantity of inventory that is produced.

Even if the firm is not operating, a large portion of the fixed manufacturing overhead cannot be avoided in the short run hence the treatment of fixed manufacturing overhead as a period expanse. Though confusing in the sense that it implies only the direct manufacturing costs are capitalized, the fact is that the variable manufacturing overhead is also capitalized in equal measure. The name is far much less than ideal because not every variable cost is capitalized as the non manufacturing costs do not get to be capitalized as a portion of the stock or inventory in any circumstance.

Usually, in variable costing, the cost of the ending stock is consisting of both the variable manufacturing overhead as well as the cost of direct manufacturing which is the materials and labor. Therefore, these are the costs for which the variable costing correspond the matching principle and as part of the inventory/stock, no other thing is