@Rosy0407 The 2 methods do only differ in their treatment for fixed manufacturing overhead. Absorption costing includes ‘Fixed OH' as a product cost, whereas Variable doesn't.
SG&A is treated as a period expense under both methods. It is never included as inventory on the balance sheet but remains as an Income Statement expense under both methods. However, the Variable Method will include Variable SG&A in the calculation of Contribution Margin (Sales – Variable Costs* = Contr. Margin). Whereas the Absorption Method calculates Gross Margin (not Contribution Margin). The Absorption method separates Period from Product costs, and the Variable method separates Fixed and Variable costs.
Product costs= DM + DL + MOH. Neither method includes SG&A as a product cost, they just differ in the treatment of overhead. SG&A will always remain as a period expense (on the Income Statement) since it is never associated with production and is not incurred within the factory.
*Notice how the equation uses “Variable Costs”, it doesn't use COGS or Product costs. It is simply every variable cost associated with the sales.
Hope that helps!
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