Managerial Accounting Exam 2

Contribution Margin =

(Revenues - total variable expense)

When the quantity produced is *GREATER* than the quantity sold income will be

*GREATER* under full costing as opposed to variable costing • Under full costing, inventory cost includes fixed manufacturing overhead • Under variable costing, fixed manufacturing overhead is a period cost

When the quantity produced is *LESS* than the quantity sold, income will be

*GREATER* under variable costing as opposed to full costing • Beginning inventory under fixed costing includes fixed manufacturing overhead • When the beginning inventory is charged to cost of goods sold the charge will be higher under full costing

Full (Absorption) Costing

*Required* by *GAAP* for external reporting purposes - the full or absorption costing approach

difference in Operating Income between Full Costing & Variable Costing

= (Change in inventory level *in* *units*) x (Fixed MOH per unit)

difference between fixed & variable is a rise b/c of

Fixed MOH

under Variable Costing

Fixed MOH is *NOT* included in inventory

Full Costing =

GAAP

Which of the following complies with GAAP for external reporting purposes?

a) Absolute costing b) Variable costing c) Fixed costing *d)* *Full* *costing* *←*

The full costing income statement *CANNOT* be used to

estimate the increase in profit due to an increase in sales

Cost of Goods Sold includes both

fixed & variable costs

Under full costing we do *NOT* know how much of cost of goods sold is for

fixed or variable

Fixed manufacturing overhead treated as a _______ _____in variable costing

period cost

Under variable costing, fixed manufacturing overhead becomes a

period expense

office expense =

period expense

The fixed costs will not increase when

sales increase

The difference between full (absorption) and variable costing is

their treatment of fixed manufacturing overhead

When the quantity produced equals the quantity sold

there is *NO* *DIFFERENCE* between net income calculated using full cost versus variable costing • Since all units produced are sold, no fixed cost ends up in ending inventory • The only difference is that variable costing calculates the contribution margin

Units produced =

units sold

Units produced *GREATER* than

units sold (Full costing yields higher net income)

Units Produced *LESS* than

units sold (Variable costing yields higher net income)

Full (Absorption) Costing: Inventory Costs

• Direct materials used -Generally variable • Direct labor incurred -Generally variable • Manufacturing overhead -Includes both fixed and variable costs

Variable Costing: Inventory costs

• Direct materials used • Direct labor incurred • Variable manufacturing overhead

other info on variable costing

• Helpful for internal decision making • Not allowed for GAAP reporting

Under full costing, fixed manufacturing overhead is included in inventory

• These costs enter into the determination of expense only when the inventory is sold