Chapter 6: Variable Costing

Question 1

Business segment

Answer 1

An identifiable part of the company for which financial information is available

Question 2

Contribution margin

Answer 2

The amount that contributes to covering the fixed costs and then to providing operating income

Question 3

Absorption costing

Answer 3

Assigns direct material, direct labor and MOH as product cost.

Period costs: Variable selling and admin, and fixed selling and admin cost

Income statement
Sales Rev: selling price * given units
Minus COGS
Equals: Gross profit
Minus Fixed and Variable selling admin
Equals: operating income

Question 4

Variable costing

Answer 4

Period costs: fixed MOH, fixed and variable selling admin
Product costs: Direct material, direct labor, variable MOH

• not allowed under GAAP

income statement
Sales rev: given units * given selling price
Minus variables costs
Equal contribution margin
Minus fixed costs
Equals operating income

Question 5

Indicate which areas it is best to use variable or absorption costing:

Answer 5

-Setting prices in the long run: Absorption

-Controlling costs by upper management: Absorption

-Production planning in the short run: Variable

• Analyzing profitability with sales mix: variable

Question 6

What happens if sales are less than production?

Answer 6

Some of the fixed manufacturing costs remain in the ending inventory on balance sheet.
- Absorption cost will have higher operating income

Question 7

What is the difference between variable costing and absorption costing?

Answer 7

Fixed manufacturing overhead