Cost Classification - Absorption and Variable Costing

The video tutorial explains cost allocation in product production, focusing on cost classifications such as direct and indirect costs. It covers two main costing methods: absorption costing, where all costs are absorbed into the product, and variable costing, which separates fixed overhead costs. The differences in how these methods affect financial reporting and gross profit are highlighted.

What are the two main types of costs discussed in the context of cost allocation?

• Direct and indirect costs

• Fixed and variable costs

• Material and labor costs

• Operational and administrative costs

In absorption costing, which costs are absorbed into the product?

• Only fixed manufacturing overhead

• Only variable manufacturing overhead

• Direct materials, direct labor, and all manufacturing overhead

• Only direct materials and labor

How does absorption costing affect the cost of goods sold?

• It only affects period expenses

• It decreases the cost of goods sold

• It increases the cost of goods sold

• It has no effect on the cost of goods sold

What is the key difference in how fixed manufacturing overhead is treated in variable costing compared to absorption costing?

• It is treated as a period expense

• It is included in the cost of goods sold

• It is ignored completely

• It is allocated to direct costs

How does variable costing generally affect the reported gross profit?

• It overstates the gross profit

• It understates the gross profit

• It only affects net profit

• It has no effect on the gross profit