@ Amor D
Under Variable Costing, Fixed Manufacturing Overhead is not treated as part of the cost
of the inventory produced. Instead, Fixed Manufacturing Overhead is expensed in the
current period. Currently expensing a cost is often referred to as treating it as a “period
costâ€. Capitalizing a cost as part of the cost of inventory is often referred to as treating it
as a “product costâ€.
The exclusion of Fixed Manufacturing Overhead from the cost of inventory makes Cost
of Goods Sold a purely Variable Cost, resulting in lower COGS.
Also, net income is higher with absorption because less FM O/H expense is recognized in the period since it is on the balance sheet and included in inventory. Under variable, all of the FM O/H would be recognized in the period and netted against sales.
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