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 costs are absorbed into the product, and variable costing, which separates fixed overhead expenses. The differences between these methods impact how costs are reported and affect gross profit and administrative expenses.

What are the two main categories of costs mentioned in the context of product production?

• Direct and Indirect Costs

• Cost of Goods Sold and Selling and General Expenses

• Fixed and Variable Costs

• Material and Labor Costs

In absorption costing, which of the following is included in the cost of goods sold?

• Only fixed manufacturing overhead

• Direct materials, direct labor, and both variable and fixed manufacturing overhead

• Only variable manufacturing overhead

• Only direct materials and labor

How does absorption costing affect gross profit?

• It increases gross profit by excluding fixed overhead

• It increases gross profit by reducing expenses

• It decreases gross profit by including more costs in the cost of goods sold

• It has no effect on gross profit

What is the primary difference in the treatment of fixed manufacturing overhead between absorption and variable costing?

• In both methods, it is treated as a period expense

• In absorption costing, it is treated as a period expense; in variable costing, it is included in cost of goods sold

• In both methods, it is included in cost of goods sold

• In absorption costing, it is included in cost of goods sold; in variable costing, it is treated as a period expense

How does variable costing generally affect the reported gross profit compared to absorption costing?

• It has no effect on gross profit

• It understates gross profit

• It results in the same gross profit as absorption costing

• It overstates gross profit