Explain the difference between absorption costing and variable (or direct) costing. Which one is more useful when establishing prices? Why?

What will be an ideal response?

Full absorption costing is the traditional method of product costing. It "absorbs" the cost of direct materials, direct labor, plus a portion of fixed and variable factory overhead into each unit manufactured. Absorption costing is not very helpful in setting prices because it confuses the true relationships among price, volume, and costs by including fixed expenses in unit-cost computations.
Direct costing includes only those costs of production that vary directly with the volume of production. Fixed overhead expenses are considered to be expenses of the period, thus, constant unit cost for the product regardless of the production level. The result is a clear picture of the price-costs-volume relationship.