1. Be able to compute the unit cost under both absorption and variable costing (ie… what...

1. Be able to compute the unit cost under both absorption and variable costing (ie… what costs go into each and what are the difference2.

Does variable or absorption costing produce a higher net income when:
- units produced equal units sold?
- units produced is greater than units sold?
- units produced is less than units sold?
Is variable or absorption costing acceptable under GAAP? Which is the better method for short-term decisions?

Expert Solution

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Units produced equal units sold?	The net income is same under variable costing and absorption costing because as there will be no ending inventory.
Units produced is greater than units sold?	The net income under variable costing is less than net income under absorption costing because as there will be ending inventory so some part of fixed manufacturing overhead will be allocated to ending units.
Units produced is less than units sold?	The net income under variable costing is more than net income under absorption costing because as the opening inventory is sold so some part of fixed manufacturing overhead was already allocated under absorption costing.

Variable costing is not acceptable under GAAP because it lowers taxable income. But absorption costing is acceptable under GAAP.

Variable costing is the better method for short-term decisions because in short run almost all costs are variable.

ekkarill92 answered 2 years ago

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