What are some differences between variable and absorption costing?

post: Variable costing is useful for internal reporting in making certain managerial decisions. For external financial reporting, GAAP requires the use of absorption costing. The main difference between variable and absorption costing is how fixed overhead is treated. Both methods include direct material, direct labor, and variable overhead in product costs. Absorption costing also includes fixed overhead in its product costs/inventory (asset/balance sheet). Once the goods are sold, those are than transferred to cost of goods sold (expense/income statement). Variable costing, on the other hand, treats fixed overhead as a period expense. Period costs are (immediately) expensed (income statement) in the period incurred.

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