Variable and Absorption Costing

Question 1

Two Product Costing Methods

Answer 1

> > Absorption (Full) Costing
Variable Costing

Question 2

Absorption Costing (formula)

Answer 2

Sales
Less: COGS
= Gross Profit
Less: Operating Expense
= Net Income

Question 3

Variable Costing (formula)

Answer 3

Sales
Less: Variable Costs
= Contribution Margin
Less: Fixed Costs
= Net Income

Question 4

Absorption Costing

Answer 4

> > Used in presenting income information to EXTERNAL USERS
GAAP confoming
Product Costs are Split into two:
** Finished Goods inventory (when unsold)
** COGS (when sold)
Operating Expenses: variable and fixed selling and administrative expenses

Question 5

Variable Costing

Answer 5

> > Used in presenting income information to INTERNAL USERS
NOT GAAP confoming
All variable costs are deducted to sales to determine the contribution margin
All fixed costs are deducted to the contribution margine to determine the net income.
Fixed manufacturing overhead must NOT be treated as product costs

Question 6

Effect in net income when using Absorption Costing vs. Variable Costing

Answer 6

> > Production = Sales; no beginning and ending inventory
** ACNI = VCNI

> > Production > Sales; no beginning inventory, with ending inventory
** ACNI > VCNI

> > Production < Sales; with beginning and ending inventory
** ACNI < VCNI