What is the reason for the profit difference between absorption cost method and variable cost method?

The fundamental reason for the difference between variable cost method and pre-tax profit in absorption cost method is that the fixed production costs deducted by the two methods are different when calculating profits. The fixed production cost deducted under the variable cost method is the current fixed production cost; The fixed production cost deducted under the absorption cost method is the fixed production cost included in the product cost sold in the current period, which is deducted from the sales cost when calculating the profit. The fundamental difference between absorption cost method and variable cost method lies in the treatment of fixed manufacturing cost. In the absorption cost method, the fixed manufacturing cost is included in the product cost, which is gradually released with the realization of product sales. In other words, fixed manufacturing costs should be allocated to sales. Under the variable cost method, fixed manufacturing expenses are directly recognized as current profits and losses, that is, regardless of the sales volume, they are recognized as current expenses.

Moreover, the different treatment of fixed manufacturing costs by variable cost method and absorption cost method leads to a series of differences between the two methods. This is mainly manifested in three aspects: the composition of product cost, the composition of inventory cost and the difference of profit and loss in each period. Variable cost method is a new model established by management accounting to reform the traditional cost calculation model of financial accounting. Its main feature is that only the variable production cost is regarded as a part of the product cost, while the fixed production cost is regarded as the period cost. This determines that the variable cost method is very different from the traditional absorption cost method.

Finally, absorption cost method and variable cost method are different in the allocation of fixed manufacturing costs. The production and sale of inventory in absorption cost method will absorb and release fixed manufacturing expenses, which will further affect the current profit. Under the variable cost method, fixed manufacturing costs are directly included in indirect costs and deducted from profits, which will have no further impact whether the inventory is sold or not. Make relevant profit adjustments.