2 - Absorption & Variable Costing

Question 1

what is absorption costing?

Answer 1

costing method which traces all manufacturing costs to products and treats non-manufacturing costs as a period cost

Question 2

what is variable costing?

Answer 2

costing method which traces all variable costs to products and treats fixed costs as period costs

Question 3

what is practical capacity?

Answer 3

theoretical capacity less activity lost from unavoidable interruptions

Question 4

what is theoretical capacity?

Answer 4

maximum operating capacity; no interruptions

Question 5

denominator reason for calculating PDOHR at start of year?

Answer 5

to overcome the volatility in unit costs caused by changes in level of activity volume

Question 6

numerator reason for calculating PDOHR at start of year?

Answer 6

avoid the unit cost volatility caused by seasonal variations in total factory OH costs

Question 7

when do overapplied OH occur?

Answer 7

when applied amount > actual amount

Question 8

when do underapplied OH occur?

Answer 8

amount applied < actual amount

Question 9

is absorption costing more appropriate for short-term or long-term?

Answer 9

long term; in short term, FMOH may be considered variable when making decisions

Question 10

how to reconcile AC and VC balances?

Answer 10

absorption costing net profit
add FMOH in o/b
less FMOH in c/b
variable costing net profit

Question 11

calculating PDOHR?

Answer 11

budgeted OH costs / budgeted activity level

one rate is used for all MOH