The differences between direct and absorption costing concern the treatment of fixed manufacturing costs. In absorption costing the fixed manufacturing costs are considered a valid part of the cost of output produced during a period and are therefore attributed to that output.
Under absorption costing, therefore, the unit cost (whether the unit is sold or is taken into inventory) contains both directly variable costs and an apportionment of total fixed costs.
Direct costing uses only directly variable costs to derive a unit cost. The fixed manufacturing costs are treated as being a cost of providing production capacity for a period and are considered a period cost rather than a cost of production produced within the period.
