Direct Versus Absorption Costing Emphasis on Income Determination and Inventory Valuation

Abstract

Direct costing treats variable costs of manufacturing as costs of inventory. On the other hand, absorption costing treats variable and fixed costs of manufacturing as costs of inventory. We conclude that fixed costs are period costs and should not be deferred in inventory because they do not benefit the future. Certain costs have been categorized as fixed by usage. Depreciation, for example, partially varies with production and should become part of the inventory cost. True fixed costs provide capacity to produce and should be charged to the period since they do not benefit the future.