COST ACCOUNTING
VARIABLE COSTING
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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Absorption costing results in higher income when inventory increases.
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Variable manufacturing costs are lower under absorption costing.
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Overhead costs are treated in the same manner under both variable and absorption costing methods.
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Profits are always the same under two costing methods.
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Detailed explanation-1: -Answer and Explanation: The correct statement about absorption and variable costing methods is option C. If the units produced are above the units sold, the company will have ending inventory units at the end.
Detailed explanation-2: -Which of the following statements is true regarding absorption costing? It assigns all manufacturing costs to products. Which of the following statements is true regarding variable costing? Only manufacturing costs that change in total with changes in production level are included in product costs.
Detailed explanation-3: -Since variable costing treats fixed manufacturing overhead costs as period costs, all fixed manufacturing overhead costs are expensed on the income statement when incurred. Thus if the quantity of units produced exceeds the quantity of units sold, absorption costing will result in higher profit.
Detailed explanation-4: -Finally, absorption costing generally results in a higher inventory than variable costing. This is because fixed costs are included in inventory under absorption costing but not variable costing. Absorption and variable costing are two different methods of accounting for product costs.
Detailed explanation-5: -Absorption costing means that ending inventory on the balance sheet is higher, while expenses on the income statement are lower.