Chapter 19: Variable Costing and Analysis

If management incentives are tied to income under absorption costing, which will occur

- Increased storage costs - Possible obsolescence - Increased financing costs

How does variable costing treat costs

-Direct labor, Direct material and variable overhead (product costs ) -Fixed overhead ( period expense )

Using a traditional ( absorption) costing system. Which of the items below would you see on an income statement

Cost of good sold, Gross margin and net income

The costing system which is considered acceptable for reporting under U.S GAAP is

absorption costing

An income statement which shows the excess of sales over variable costs is referred to as a

contribution margin income statement

The variable costing methods includes all of the following costs

direct labor, direct materials and variable overhead

When using absorption costing when production is greater than sales , a portion of fixed overhead is allocated in

ending inventory

When units produced equals units sold , income under absorption costing will be

equal to net income under variable costing

Absorption is used for

external reporting

The key difference between absorption and variable costing is

fixed overhead

Variable costing is normally used for

internal reporting

The main difference between absorption and variable costing is their treatment of

fixed overhead

Under absorption costing, fixed overhead is allocate to products sold , so when production is greater than units sold , net income will be

greater than income calculated under variable costing

Regardless of whether variable costing or absorption costing is used , if quantity produced differs from quanta sold

income will be different

Under the variable costing method

only total costs which vary with changes in production volume are assigned to products

A contribution format income statement

reports variable costs separately from fixed costs

Contribution margin is the excess of

sales- variable costs

How does absorption costing treat all costs ?

As products costs

In a variable costing , which of the following items would be shown on the income statement

variable expenses contribution margin net income

Difference in income between variable costing and absorption costing is due to

timing