The underlying difference between absorption costing and variable costing lies in the treatment of:

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The main difference between absorption costing and variable costing is in the treatment of fixed manufacturing overhead. Under absorption costing, fixed manufacturing overhead is treated as a product cost and is included in the cost of goods sold. Under variable costing, fixed manufacturing overhead is treated as a period cost and is expensed in the period in which it is incurred. Direct labor, variable manufacturing overhead, variable selling and administrative expenses, and fixed selling and administrative expenses are treated the same way under both costing methods.

The Underlying Difference Between Absorption Costing and Variable Costing Lies