... labour, are determined based on the period in which they are incurred. However, in the full absorption costing method, fixed manufacturing overheads are allocated between the cost of goods sold and the value of inventory held at the end of the period. Variable costing method is not acceptable to tax authorities and it does not also meet the requirements of the accounting standards for valuation of inventory. Since fixed manufacturing overheads are incurred necessarily, exclusively and wholly for the manufacturing of the products, both the accounting standard setting bodies and tax authorities require that applicable fixed manufacturing overheads are included in the product costs (cost of goods sold) as well as in the valuation of inventory. Full absorption costing method is therefore an acceptable method of valuation for tax and financial reporting requirements. Variable costing method is used for internal reporting and it has its value in performance management and organizational ...

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