Variable and Absorption Costing

What is the costing method that treats all fixed costs as period costs?

• Absorption costing

• Job-order costing

• Variable costing

• Process costing

Brown Co.’s 2021 fixed manufacturing overhead costs totaled P 100,000 and variable selling costs totaled P 80,000. Under direct (variable) costing, how should these costs be classified?

• PERIOD COST- 0; PRODUCT COST 180K

• PERIOD COST- 80K; PRODUCT COST 100K

• PERIOD COST 100K; PRODUCT COST 80K

• PERIOD COST 180K; PRODUCT COST- 0

A basic tenet of direct costing is that period costs should be currently expensed. What is the basic rationale behind this procedure?

• Period costs are uncontrollable and should not be charged to a specific product

• Period costs are generally immaterial in amount and the cost of assigning the amount to specific products would outweigh the benefits

• Allocation of period costs is arbitrary at best and could lead to erroneous decisions by management

• Period costs will occur whether or not production occurs and so it is improper to allocate these costs to production and defer a current cost of doing business

Under variable costing,

• Net income will tend to move based on changes in levels of production

• Inventory costs will always be lower than under absorption costing

• Net income will always be higher than under absorption costing

• Net income will tend to vary inversely with production changes

The use of variable costing requires knowing

• The controllable and non-controllable components of all costs

• The number of units of each product produced during the period

• The contribution margin and break-even point for all the units produced

• The variable and fixed components of production costs

Income under absorption costing may differ from income under variable costing. How is this difference calculated?

• Change in the quantity of units in inventory times the fixed factory overhead rate per unit

• Number of units produced during the period times the fixed factory overhead rate per unit

• Change in the quantity of units in inventory times the variable manufacturing cost per unit

• Number of units produced during the period times the variable manufacturing cost per unit

When production exceeds sales, fixed manufacturing overhead costs

• Are released from inventory under absorption costing

• Are deferred in inventory under absorption costing

• Are released from inventory under variable costing

• Are deferred in inventory under variable costing

What best accounts for profit difference between absorption costing and variable costing method?

• Difference in fixed costs incurred

• Difference in variable costs incurred

• Difference in sales revenue

• Difference in inventory valuation

Variable costing and absorption costing will show the same incomes when there are no

• Beginning inventories

• Ending inventories

• Variable costs

• Beginning and ending inventories

Absorption costing and variable costing differ in that

• Standards can be used with absorption costing, but not with variable costing.

• Absorption costing inventories are more correctly valued.

• Production influences income under absorption costing, but not under variable costing.

• Companies using absorption costing have lower fixed costs.