Video: Absorption Costing vs. Variable Costing

In this lesson, Nick Palazzolo, CPA, delves into the core differences between absorption costing and variable costing, demonstrating how each method treats fixed costs. He simplifies these complex concepts, focusing on their practical application and effects on inventory value and net income. With clear explanations, Nick reveals why absorption costing is favored for external reporting under GAAP, while variable costing serves better for internal decision-making. Offering real-world examples, such as the impact of different costing methods on a chair factory's financials, Nick aids in understanding the implications for inventory valuation and net income under various production scenarios. This discussion is vital for grasping not just the mechanics, but also the strategic choice between these two costing methods in different business contexts.