Chapter 6 - Variable Costing & Segment Reporting

Product cost under absorption costing is characteristically:

higher than under variable costing. (Product cost under absorption costing is characteristically higher than under variable costing because the fixed overhead costs are included in product costs when absorption costing is used but not when variable costing is used.)

The principal difference between variable costing and absorption costing centers on:

whether fixed manufacturing costs should be included in product costs.

Variable costing is also known as:

Direct costing or Marginal costing.

The term gross margin is used in reports prepared using:

absorption costing but not variable costing.

If units produced are greater than units sold:

absorption costing net operating income is greater than variable costing net operating income. (Fixed manufacturing overhead is deferred in inventory under absorption costing. This results in lower costs and higher net operating income.)

If units produced are less than units sold:

absorption costing net operating income is less than variable costing net operating income. (Fixed manufacturing overhead is released from inventory under absorption costing. This results in higher costs and lower net operating income.)

When sales are constant but production fluctuates:

net operating income will be erratic under absorption costing. (When production fluctuates, net operating income will be erratic under absorption costing because fixed manufacturing overhead costs will be shifted into and out of inventory as production goes up and down.)

If a cost is a common cost of the segments on a segmented income statement, the cost should:

not be allocated to the segments.

When production exceeds sales, fixed manufacturing overhead costs:

are deferred in inventory under absorption costing. (When production exceeds sales, units are added to inventory. Thus, fixed manufacturing overhead costs are deferred in inventory under absorption costing.)

Under absorption costing, fixed manufacturing overhead costs:

are deferred in inventory when production exceeds sales.

George Corporation has no beginning inventory and manufactures a single product. If the number of units produced exceeds the number of units sold, then net operating income under the absorption method for the year will:

be greater than the net operating income under variable costing.

Variable costing is attractive to managers as an alternative to absorption costing because:

to generate data for CVP analysis, considerable time would have to be invested to rework income statements constructed under absorption costing. (Variable costing is attractive to managers as an alternative to absorption costing because to generate data for CVP analysis, considerable time would have to be invested to rework income statements constructed under absorption costing.)