Ch. 8 - Variable Costing

Question 1

Absorption Costing

Answer 1

The traditional costing system. DM, DL, VOH, and FOH are all considered product costs. SG&A expenses are period costs

Question 2

Variable Costing

Answer 2

DM, DL, VOH are all considered product costs. FOH and SG&A expenses are period costs (hence FOH = 0 when calculating product costs under variable costing)

Question 3

Who uses income statements created using absorption (traditional) costing?

Answer 3

Primarily external users (stakeholders, investors, the general public, etc.)

Question 4

Who uses income statements created using variable costing?

Answer 4

Primarily managers

Question 5

Units Produced > Units Sold. Which is greater: (1) operating income under absorption costing or (2) operating income under variable costing

Answer 5

(1): OI under absorption > OI under variable

Question 6

Units Produced < Units Sold. Which is greater: (1) operating income under absorption costing or (2) operating income under variable costing

Answer 6

(2): OI under absorption < OI under variable

Question 7

Units Produced = Units Sold. Which is greater: (1) operating income under absorption costing or (2) operating income under variable costing

Answer 7

They are the same: OI under absorption = OI under variable

Question 8

Reconciliation of Variable and Absorption Costing

Answer 8

Variable Costing OI
Add: FOH deferred in ending inventory under absorption costing
Less: FOH released from beginning inventory under absorption costing
Absorption Costing OI

Question 9

Advantages of Variable Costing

Answer 9

• eliminates distortions to income and product costs when volume changes
• reduces the dysfunctional incentives to overproduce

Question 10

Disadvantages of Variable Costing

Answer 10

• determining what costs are fixed and variable is subjective
• produces misleading cost figures
• not used for financial reporting (does not follow GAAP)