How to use the absorption vs variable costing calculator
- Enter the units produced and sold, the selling price and the variable production cost per unit.
- Add the variable selling cost per unit, the fixed production overhead and the fixed selling and administrative costs for the period.
- Read the operating income under each method and the difference between them.
- Open the three tables to see both income statements and the reconciliation through the fixed overhead held in inventory.
Formula
fixed overhead per unit = fixed production overhead / units produced
absorption income = sales - units sold x (variable cost + fixed overhead per unit) - selling and administrative costs
variable income = sales - units sold x (variable production + variable selling cost) - all fixed costs
difference = (units produced - units sold) x fixed overhead per unit
Absorption costing puts a share of fixed production overhead into every unit, so the part that belongs to unsold units waits in inventory. Variable costing expenses all of it in the period.
Making 10,000 units and selling 8,000
Price is $25, variable production cost $9, variable selling cost $2, fixed production overhead $50,000 and fixed selling and administrative costs $20,000. Fixed overhead per unit made is $5.00, so cost of goods sold is 8,000 x $14 = $112,000. Sales are $200,000, gross margin $88,000, selling and administrative $36,000 and absorption operating income $52,000.
Variable costing gives variable costs of 8,000 x $11 = $88,000, contribution margin $112,000, fixed costs $70,000 and operating income $42,000. The $10,000 difference is the 2,000 unsold units times $5.00 of overhead. Inventory is worth $28,000 under absorption and $18,000 under variable costing.
What the difference tells you
When production is higher than sales, absorption costing shows more income because overhead is deferred in inventory. When sales are higher than production the effect reverses, and when the two are equal the methods agree. This is why a manager paid on absorption income could be tempted to build stock, and why many firms look at the variable view for internal decisions.
To size the cost parts, the High-Low Method Calculator separates fixed and variable cost from past data. For the product side, the COGS Calculator and the Overhead Rate Calculator cover the related arithmetic.
What the tool leaves out
There is no opening inventory, so units sold cannot exceed units produced. Standard costing variances, over or under applied overhead, taxes and the choice of cost flow assumption such as first in first out are not modeled. The tool shows the idea with a single period.
Assumptions and limits
- The period starts with no stock of finished goods.
- Variable costs per unit and total fixed costs do not change with the number of units in the range shown.
- The overhead rate is actual fixed overhead divided by actual units produced.
- Selling and administrative costs are treated as period costs under both methods.
- The tool explains the mechanics of two methods and is not accounting advice.
Frequently asked questions
Which method is required for financial statements?
Reports prepared for outside readers generally use absorption costing, while variable costing is mainly an internal management view. Check the rules that apply to your reports with your accountant.
Why is the income difference exactly the fixed overhead in inventory?
Both methods charge the same total costs over the life of the goods. They only differ in when the fixed production overhead reaches the income statement, so the gap is the amount still sitting in stock.
What happens if I sell more than I produce?
With no opening stock that cannot happen in one period, so the tool asks you to lower the units sold or raise the units produced. A fuller model would need the cost of the opening inventory.
Where do I enter depreciation on the factory?
Include it in the fixed production overhead. It is a fixed cost of making the goods, so it is spread over units under absorption costing and expensed in full under variable costing.