4- Variable and Absorpotion Costing

Question 1

What is the main difference betwen variable & absorption costing?
What is it classified as for absorption? & Variable?

Answer 1

FIXED Manufacturing Overheads

Product costs, period costs

Question 2

What is considered Period costs for both costings?

Answer 2

Sales and Admin costs

Question 3

What are considered Product costs for both?

Answer 3

Direct Labour,
Direct Manufacturing,
VARIABLE Manufacturing Overheads

Question 4

If production exceeds sales in a given year what is going to be greater variable/absorption profit?

Answer 4

Absorption Profit

Question 5

If production is equal to sales in a given year what is going to be greater variable/absorption profit?

Answer 5

The same

Question 6

If Sales exceed production in a given year what is going to be greater variable/absorption profit?

Answer 6

Variable profit

Question 7

Advantages of the Variable Costing

(Contribution) Approach [7]

Answer 7

Management finds it easy to understand
Consistent with CVP analysis
Net profit is closer to net cash flow
Profit is not affected by changes in stock
Impact of fixed costs on profits emphasised
Consistent with standard costs and flexible budgeting
Easier to estimate profitability of products and segments

Question 8

Arguments against Variable Costing [3]

Answer 8

•Fixed production costs are incurred in the
production of output. It is fair to charge all output
with a share of these costs
•Charging only variable costs makes it difficult to
assess if a product is profitable or not (IF)
•Product pricing can be a challenge (IF)

IF fixed manufacturing overhead are a high
proportion of total costs

Question 9

How do you calculate the Fixed Manufacturing Overhead for absorption costing?

Answer 9

Fixed Manufacturing Cost in Period /

Units Produced in Period

Question 10

•Absorption costing appreciates the importance
of ___ costs. Prices need to cover all costs
•Absorption costing is consistent with __ ___
•For internal reporting purposes:
• ___costing should be used for planning and decision making
• ___ costing is better for pricing and stock valuation

Answer 10

fixed
external reporting
Variable
Absorption

Question 11

In a JIT stock system ___ tends to equal ___
So, the difference between variable and
absorption profit __ ____

Answer 11

Production, sales

is zero

Question 12

SUMMARY
The difference between variable and absorption
costing is in the treatment of ___ ___ costs.
✓ Absorption costing: ____ costs
✓ Variable costing: ____ costs
▪ Selling and Admin costs: are __ ___ costs
▪ Variable costing income statement : contribution
margin is shown (this is an important figure for
___ ___ purposes)
▪ There is no right/wrong approach, it depends on
the purpose of the analysis and the __ structure of
an organisation

Answer 12

MANUFACTURING FIXED
product
period
ALWAYS period
decision making 
cost