Variable vs absorption costing....Clear as$.....$Mud? If you are having trouble wrapping your mind around the difference between variable and absorption costing, just remember, it's all about the fixed factory overhead! Variable costing does not include FFO as a product cost, while absorption costing does. Note the difference this makes in terms of how those costs then end up on the income statement.

So in variable costing, all fixed factory overhead cost is expensed in the period in which it is incurred, while in absorption costing, the fixed factory overhead is included in the product cost and doesn't get expensed until it becomes COGS, which doesn't happen until the product is sold.

Recall that GAAP requires the use of absorption costing on the traditional income statement.

Why is it a good idea for managers to see the costs and resulting operating income under both methods? How can seeing the variable costing method help management with good decision making? How can the use of the GAAP absorption costing income statement hide the fact that a business is struggling? Why is this important for internal stakeholders $($especially management$)$ to understand?