Podcast
Questions and Answers
What does product contribution margin directly indicate?
What does product contribution margin directly indicate?
When production exceeds sales, how does absorption costing net income compare to variable costing net income?
When production exceeds sales, how does absorption costing net income compare to variable costing net income?
Which of the following is a disadvantage of absorption costing?
Which of the following is a disadvantage of absorption costing?
What constitutes total contribution margin?
What constitutes total contribution margin?
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What is a consequence of under-absorbed overhead on financial statements?
What is a consequence of under-absorbed overhead on financial statements?
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Which statement about variable costing is TRUE?
Which statement about variable costing is TRUE?
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What occurs when the predetermined overhead rate is too high?
What occurs when the predetermined overhead rate is too high?
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What impact does absorption costing have on inventory levels when production and sales are equal?
What impact does absorption costing have on inventory levels when production and sales are equal?
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Which of the following is a primary focus of variable costing?
Which of the following is a primary focus of variable costing?
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How is over-absorbed overhead treated in financial statements?
How is over-absorbed overhead treated in financial statements?
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What is a key characteristic of absorption costing?
What is a key characteristic of absorption costing?
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How does variable costing treat fixed overhead?
How does variable costing treat fixed overhead?
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Which statement accurately contrasts absorption costing and variable costing?
Which statement accurately contrasts absorption costing and variable costing?
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What type of costs does variable costing ultimately report in the cost of goods sold?
What type of costs does variable costing ultimately report in the cost of goods sold?
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Which of the following classifications is utilized in absorption costing for the income statement?
Which of the following classifications is utilized in absorption costing for the income statement?
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What primary advantage does absorption costing provide compared to variable costing?
What primary advantage does absorption costing provide compared to variable costing?
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Why is fixed overhead classified as a product cost in absorption costing?
Why is fixed overhead classified as a product cost in absorption costing?
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How is total variable product cost treated under both costing methods?
How is total variable product cost treated under both costing methods?
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Study Notes
Absorption Costing
- Treats all manufacturing costs (direct materials, direct labor, variable overhead, and fixed overhead) as product costs.
- Traditional approach to product costing.
- Required for external financial statements and tax returns.
- Also known as full costing.
- Presents expenses on an income statement according to their functional classifications.
- Fixed overhead is considered a product cost.
- Perceived to provide a more informative picture of earnings for external parties compared to variable costing.
Variable Costing
- Treats only variable production costs (direct materials, direct labor, and variable overhead) as product costs.
- Treats fixed overhead as a period cost.
- Also known as direct costing.
- Not acceptable for external reporting and tax returns.
- Presents expenses on an income statement according to cost behavior (variable and fixed).
- Product contribution margin is the difference between selling price and variable cost of goods sold.
- Total contribution margin is the difference between revenue and all variable costs.
Absorption Costing vs. Variable Costing
- When production equals sales, absorption costing net income equals variable costing net income.
- When production exceeds sales, absorption costing net income exceeds variable costing net income.
- When production is less than sales, absorption costing net income is less than variable costing net income.
Advantages and Disadvantages
Absorption Costing
- Includes fixed production overheads in inventory values.
- Analyzing under/over absorption of overheads can help with cost control.
- Best way to estimate job costs and profits in smaller organizations.
Variable Costing
- Contribution margin per unit is constant.
- No under or over absorption of overheads.
- Useful for decision making.
- Simple to operate.
Over-Absorbed Overhead vs Under-Absorbed Overhead
- Over-absorbed overhead: Occurs when the predetermined overhead rate is too high, resulting in more overhead being applied to products than was actually incurred.
- Under-absorbed overhead: Occurs when the predetermined overhead rate is too low, resulting in less overhead being applied to products than was actually incurred.
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Description
Explore the key differences between Absorption Costing and Variable Costing in this quiz. Understand how each method treats manufacturing costs and their impact on financial statements. This quiz is essential for accounting students and professionals looking to deepen their knowledge of cost accounting principles.
