Chapter 6: Variable Costing and Segment Reporting

Question 1

Difference between variable costing and absorption costing

Answer 1

absorption costing includes manufacturing overhead as a product cost whereas variable costing includes MOH as a period cost

Question 2

Which costing method will produce the highest values for work in process and finished goods inventories?

Answer 2

absorption costing because the fixed MOH is added to the product cost

Question 3

Variable Cost vs absorption cost contribution formats

Answer 3

Variable Cost Contribution formats include the fixed MOH after the contribution margin with the other fixed period costs.

Absorption Cost contribution formats include the fixed MOH as part of the Variable Cost of Goods Sold

Question 4

Effect on inventory when units produced are equal to units sold
Which costing method is greater?

Answer 4

No change in inventory
&
Absorption = Variable

Question 5

Effect on inventory when units produced are greater than units sold
Which costing method is greater?

Answer 5

Inventory increases
&
Absorption > Variable

Question 6

Effect on inventory when units produced are less than units sold
Which costing method is greater?

Answer 6

Inventory decreases
&
Absorption < Variable

Question 7

Explain Variable Costing in VCP Analysis

Answer 7

Variable costing categorizes costs as variable and fixed so it is much easier to use this income statement format for CVP analysis.

Question 8

Explain Absorption Costin in VCP Analysis

Answer 8

Because absorption costing assigns fixed manufacturing overhead costs to units produced, a portion of fixed
manufacturing overhead resides in inventory when units remain unsold. The potential result is positive operating income when the number of units sold is less than the breakeven point.

Question 9

Explain changes in net operating income between absorption and variable costing

Answer 9

Variable costing has a net operating income only affected by sales and not the number of units produced. Sales go up, net income goes up

Absorption costing has a net operating income affected by the change in unit sales and units of production. Net operating income is increased as more units are produced not necessarily sold.

Question 10

Which costing method correctly identifies variable costs and fixed costs affects

Answer 10

Variable costing