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