Chapter 6: Variable and Absorption Costing Flashcards
Net Income moves in the same direction as sales in:
Variable Costing
In product costs it includes:
DM, DL, VOH, VSC, VAC (Sales - VC)
Operating Expenses
POH, FSC, FAC
Variable Costing
In variable costing, the company will have the highest net operating income in the year with the:
Highest sales units
In variable costing:
All FOH is expensed in the year incurred as a period cost
Why is NOI not affected by changes in production using variable costing?
Becuase all FOH is period costs fully expensed in each period
Does production have an impact on NOI when using variable costing?
No
What are some period costs under variable costing?
Depreciation on the chief financial officer’s company chair and the salary of the factory manager
In absorption costing, which year has the highest FOH unit cost?
the year with the smallest number of units produced will give you the highest unit cost FOH
Which year will absorption costing NOI be greater than variable costing NOI?
When production units are greater than sales units
Why is NOI affected by changes in production using absorption costing?
Becuase FOH costs shifts between period as a result of changes in F.G inventory
Variable and Absorption costing produce different NOI whenever the number of units produced is different from the number of units sold, when is this not true?
When JIT is used, these differences go away
What will still differ using JIT?
Unit product cost will still differ but the differences in NOI will largely disappear
Production = Sales
Absorption NOI = Variable Costing NOI
Absorption FOH is expensed in COGS
Variable FOH is expensed as a period cost
Production > Sales
Absorption NOI > Variable Costing NOI
Variable FOH is expensed with Expenses > using VC
Production < Sales
Absorption NOI < Variable Costing NOI
Because you have “older” units of product sold. We say we have FOH released to COGS under Absorption.
Variable FOH is expensed the previous year
Product Costs Under absorption
Fire insurance cost on the factory building
DM, DL, VOH, POH
All other things the same, if a division’s traceable fixed expenses decrease, then the division’s segment margin will increase
True
Absorption Costing Ending F.G Inventory Formula
End F.G inv units x current year FOH u/c
Absorption Costing Begining F.G Inventory Formula
Beginning F.G Inv units x prior year FOH u/c
There will always be a difference in NOI whenever
the number of units produced does not equal the number sold
Net Operating income fluctuates directly with changes in sales volume
Variable Costing
Variable manufacturing overhead costs are treated as product costs under both absorption and variable costing
True
Under the absorption costing method, a company can increase profits by increasing the number of units produced
True
All other things the same, if a division’s traceable fixed expenses decrease then the division’s segment margin will decrease
False
