Chapter 8: Absorption Costing & Variable Costing

Question 1

absorption costing and variable costing

Question 2

Absorption costing

Answer 2

FOH is a product cost (and gets attached to the product so flows through as inventory)

youll use this in cogs!

Question 3

Variable costing

Answer 3

FOH is treated as a period cost and does not flow through as inventory

Question 4

absorption costing definition

Answer 4

All variable and fixed manufacturying costs are PRODUCT costs!!!

Question 5

Variable costing

Answer 5

only variable manufacturying costs are prodcut costs

Question 6

absorption costing and variable costing internal or external

Answer 6

Absorption: EXTERNAL

Variable: Internal

Question 7

Absorption costing
- inventoriable cost
- FOH treatment?
- what do prod levels impact?
- op income can be manipulated how?

Answer 7

• ALL manufacturing costs are product costs
• FOH is product cost
• Cost of inventory and COGS
• by adjusting production

Question 8

Variable costing
- inventoriable cost
- FOH treatment?
- what do prod levels impact?
- op income can be manipulated how?

Answer 8

• variable manufacturing costs are product costs
• Period cost!
• prod levels dont impact cost of inventory and COGS
• op income cant be manipulated by production levels

Question 9

what does inventoriable cost mean?

Answer 9

PRODUCT COST

Question 10

Variable costing does not defer fixed manufacturing
overhead to the future - i.e., they are not inventoried

Question 11

Net income under absorption costing vs variable costing

Answer 11

• Higher when units produced exceed units sold
• Lower when units produced are less than units sold
• Equal when units produced and sold are the same:
• There is no ending inventory so fixed costs are not deferred
  into the future

Question 12

basically what youre doing is determining the total manufacturing cost differently

Answer 12

DM + DL + VMOH + FMOH (Absorption)

DM + DL + VMOH (Variable)

Question 13

how is ending inventory and cogs and statement report impacted under each?

Answer 13

AC:
- ending inv *(mfc INCLUDING FMOH)
- units sold *(mfc INCLUDING FMOH)
- Gross Profit

VC:
- ending inv *(mfc WITH NO FMOH)
- units sold *( mfc WITH NO FMOH)
- Contribution margin

Question 14

absorption costing- decision making concern

Answer 14

• EXTERNAL REPORTING REQUIRES THIS! under GAAp
• no different between DC and VC
• FMOH is necessary in production
• not including this cost is understaing product cost

Question 15

VC decision making concerns

Answer 15

• used for internal reporting and deciison making (pricing decisions, performance evaluation)
• highlights the separatiogn between fc and vc (ties in with cvp analysis and breakeven)
• improves pricing decisions (any price above a good’s vc is positive contribution margin for company)

Question 16

pros of vc

Answer 16

Consistent with CVP and incremental analysis
* Net income unaffected by changes in production
levels
* Net income closely tied to changes in sales levels –
not production levels
* Easier to identify fixed and variable costs and their
effect on the compa

Question 17

FMOH rate

Answer 17

FMOH costs incurred/units produced

OR

FMOH expensed in COGS in absorption*/units sold

(FMOH in COGS=FMOH rateactual volume
sold)

Question 18

absorption costing is not useful for

Answer 18

Not useful for CVP, cost behaviour, etc.

cuz it blends all the varibale and fixed stuff

Question 19

why is ac net income> vc net income when produced > sales?

Answer 19

this is because the entire fixed cost is included in the vc method!!!

Question 20

how do you reconcile the incomes between the ac and vc method?

Answer 20

Absorption income-variable costing income=

Change in inventory from the
beginning to the end of the
period*FMOH rate

Question 21

how to reconcile net incomes?

Answer 21

variable net income + (FMOH deferred) = absorption

Question 22

Alternative method:
Variable costing profit
Add (less) FMOH deferred (released)
Equals Absorption costing profit