Absorption and Direct Costing Effects

Question 1

When does absorption costing income equal direct costing income?

Answer 1

When the number of units sold equals the number of units produced, absorption costing and direct costing produce identical incomes.
(Note: This assumes that fixed cost per unit remains the same from one period to the next).

Question 2

How is the contribution margin calculated using the direct costing method?

Answer 2

Contribution margin is equal to revenue minus all variable costs, including period costs.

Question 3

Which costing method is required for compliance reporting (i.e., financial and tax reporting)?

Answer 3

Absorption costing.

Question 4

How does absorption costing (AC) versus direct costing (DC) effect inventory valuation?

Answer 4

Inventory using AC will always be greater than inventory using DC because AC includes fixed product overhead costs.

Question 5

What types of product costs are included in the direct costing model?

Answer 5

Only variable manufacturing costs are included in product costs.