Video - Absorption and Direct Costing Effects

Question 1

Absorption costing - Treatment of Fixed Manufacturing costs

Answer 1

Fix manufacturing OH is allocated to each item produced

These costs are deferred as an asset and not expensed until the inventory is sold

Question 2

When do absorption costing and direct costing produce the same net income?

Answer 2

When the number of units sold equals the number of units produced

Question 3

Reconciling Net Income

Answer 3

Fixed Costs in Ending Inventory
- Fixed Costs in Beginning Inventory
= Change in Inventory Level

x

Fixed Manufacturing OH per Unit

When positive: absorption costing NI > variable costing NI

When negative: variable costing NI > absorption costing NI

Question 4

Name the relationship between units sold and units produced and income level differences

Answer 4

units sold = units produced —> AC > DC

units sold > units produced —> AC AC > DC

Question 5

Assume ending inventory is 5,000 units with a fixed cost per unit of $10; and beginning inventory is 2,000 units with a fixed cost per unit of $10.

What is the difference in income between direct costing and absorption costing

Answer 5

Ans.

5,000 x $10 = $50,000
2,000 x $10 = $20,000

3,000 x $10 = $30,000

AC > DC by $30,000

Question 6

Cay Co’s 2005 fixed manufacturing OH costs totaled $100,000 and variable selling costs totaled $80,000.

Under direct costing, how should these costs be classified?

Period Costs: _________
Product Costs: __________

Answer 6

Ans.

Period Costs: $180,000
Product Costs: $0

Direct Costing is Variable Costing
Variable costing treats fixed mfg OH costs as period costs and all selling costs are period costs

Question 7

When production is greater than sales, absorption costing is greater or less than variable costing income

Answer 7

Greater.

When production is greater than sales, fixed manufacturing OH is capitalized in inventory where it is expensed in direct costing.

Question 8

Direct Income Statement

Answer 8

Sales
Variable manufacturing
Variable selling & admin
Contribution Margin
Fixed manufacturing
Fixed selling and admin
Operating Income

Question 9

Absorption IS

Answer 9

Sales
Variable manufacturing
Fixed manufacturing
Gross Margin
Variable selling and admin
Fixed selling and admin
Operating Income

Question 10

In a process cost system, the application of factory overhead usually would be recorded as an increase in
	A.  Finished goods inventory control.
	B.  Factory overhead control.
	C.  Cost of goods sold.
	D.  Work-in-process inventory control.

Answer 10

Ans. D. Work-in-process inventory control

Journal entries to record the manufacturing cost are similar for job-order and process costing. When overhead is applied, it is debited to work in process. The credit is to factory overhead applied. Work in process receives only applied overhead, unless some underapplied factory overhead is allocated to work in process at the end of the period.