PROBLEM ? Briefly explain the following 1. What is absorption costing? 2. What i
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PROBLEM ? Briefly explain the following 1. What is absorption costing? 2. What is variable costing? 3. How are absorption costing and variable costing the same? 4. How are absorption costing and variable costing different? 5. When units produced equals units sold, how does operating income differ between variable costing and absorption costing? 6. When units produced exceed units sold, how does operating income differ between variable costing and absorption costing? 7. When units produced is less than units sold, how does operating income differ between variable costing and absorption costing?Explanation / Answer
Answer 1. Absorption costing means that all of the manufacturing costs are absorbed by the units produced. In other words, the cost of a finished unit in inventory will include direct materials, direct labor, and both variable and fixed manufacturing overhead. As a result, absorption costing is also referred to as full costing or the full absorption method.
Answer 2.
Variable costing is a managerial accounting cost concept. Under this method, manufacturing overhead is incurred in the period that a product is produced. This addresses the issue of absorption costing that allows income to rise as production rises. Under an absorption cost method, management can push forward costs to the next period when products are sold. This artificially inflates profits in the period of production by incurring less cost than would be incurred under a variable costing system.[1] Variable costing is generally not used for external reporting purposes. Under the Tax Reform Act of 1986, income statements must use absorption costing to comply with GAAP.
Variable costing is a costing method that includes only variable manufacturing costs—direct materials, direct labor, and variable manufacturing overhead—in unit product costs.
Answer 3.
Absorption costing is often contrasted with variable costing or direct costing. Under variable or direct costing,
Answer 4.
Under variable or direct costing, the fixed manufacturing overhead costs are not allocated or assigned to (not absorbed by) the products manufactured. Variable costing is often useful for management's decision-making. However, absorption costing is required for external financial reporting and for income tax reporting.
Answer 5
Units of production equals to sales when these units of production equvialized with coat of production
That equvialized with
1.Direct material
2.Direct labour
3.Over heads
And price adjustment with opening inventory and closing inventory and margin adjustments to cost of production .
Yes, operating income seggregates variable cost and absorption costing under variable direct cost and fixed manufacturing cost ,
Because variable cost will be effected on contribution , but absorption costing includes fixed manufacturing cost , then net operating income available after making adjustment of fixed cost.
Answer 6:
When production units exceeds units sold, variable cost and fixed cost increases automatically,because when the volume of production changes then variable cost cope up with production units also ,result of this action will provide lower contribution then after applying fixed cost net operating income will be automatically effected and reduced,here increases it's cost heavily.
Answer 7
There is quite opposite action to question no 6
If production units lesser than sales units ,here variable cost based sales volume ,so fixed cost as per absorption will be same there is no change in fixed cost so only variable cost will be affected and net operating income will be reduced not in high .
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