Module 6

Question 2

What us absorption costing?

Answer 2

All production costs (both fixed and variable) are considered part of the cost of making a product.

They treats all costing of production as product cost

Key point: Absorption costing spreads the fixed overhead costs across all units produced. This means that each product unit’s cost includes both fixed and variable expenses.

Also called: Full cost method, because it includes all production costs.

Question 3

What is included in absorption costing?

Answer 3

Direct materials
Direct labour
Variable manufacturing overhead
Fixed manufacturing overhead

Question 4

What is variable costing?

Answer 4

Only the costs that change with production (variable costs) are treated as product costs

Also called marginal costing or direct costing

What it excludes: Fixed manufacturing overhead. Instead, fixed costs are considered period costs and are charged against revenue in the same period they occur.

Key point: does not include any fixed overhead.

Question 5

What is included in variable costing?

Answer 5

Direct materials
Direct labour
Variable manufacturing overhead

Question 6

What is profit reporting?

Answer 6

Profit reporting is made in financial statements

There are three types of financial statements

Income statement (Profit and loss statement)

Balance sheet (statement of financial position)

Cash flow statement.

Question 7

What is the profitability metrics in absorption costing?

Answer 7

Gross margin.

Gross margin helps assess how efficiently a company is producing its goods relative to its sales.

Gross margin focuses on production efficiency.

Question 8

What is the profitability metrics in variable costing?

Answer 8

Contribution margin.

Contribution margin shows much revenue is contributing to covering fixed costs and generating profit.

Contribution margin includes more detailed variable cost information related to specific sales and operations.

Question 9

What are the 2 cost classification?

Answer 9

Product cost:
 Product cost are all the costs directly tied to producing goods in general
 Product costing is essential in determining the Cost of Goods Sold (COGS) and product cost.
 Product costs is closely related to COGS but are not quite the same thing
 COGS represents the direct costs associated with the production of goods that a company has sold during a specific period
 Product costs become COGS when the related products are sold.
 Until products are sold, product costs are part of inventory (an asset on the balance sheet).
 Once the product is sold, the product costs are transferred to the income statement as COGS.
 Product costing helps businesses calculate COGS, which is crucial for financial reporting, inventory management, and setting pricing strategies.

Period cost:
 Period costs are expenses that are not directly tied to the production process (often over a period).
 Period costs include
* Selling expenses
* Administrative expenses
* Interest expense and taxes