Ch. 7 - Profit reporting under variable costing and absorption costing

Question 1

Variable costing

Answer 1

A costing method that includes only variable manufacturing costs – direct materials, direct labour and variable manufacturing overhead – in the cost of a unit of product.

Another term for direct costing and marginal costing

Question 2

Fixed manufacturing overhead cost deferred in inventory

Answer 2

The portion of the fixed manufacturing overhead cost of a period that goes into inventory under the absorption costing method as a result of production exceeding sales.

Question 3

Fixed manufacturing overhead cost released from inventory

Answer 3

The portion of the fixed manufacturing overhead cost of a prior period that becomes an expense of the current period under the absorption costing method as a result of sales exceeding production.