Question

Discuss and compare absorption costing income statements with variable costing income statements. In your discussion, address the following questions: 10 points
a. What is the main difference between the two methods?

b. Under what circumstances will the operating income under each method be the same?
c. What situation will cause the absorption costing income to be higher than the variable costing income?
d. What situation will cause the absorption costing income to be lower than the variable costing income?
e. Why would a company use absorption costing to prepare its income statements?
f. Why would a company use variable costing to prepare its income statements?

Answer 1

1. The main difference between this two methods is that Absorption Costing charges Fixed Cost to Number of units produced during that period. On the other hand variable costing charges Fixed Cost directly as expenses for the period and not on the units produced. It can also be said that the Fixed Cost is directly deducted from the units which are sold during the period.
2. When the number of units produced are sold in that period without maintaining inventory at that time operating income under both the methods will be the same.
3. If the fixed cost allocated to the ending inventory is more than fixed cost allocated to opening inventory than income under absorption costing will be more.
4. If the fixed cost allocated to ending inventory is less than the fixed cost allocated to opening inventory than the income under variable costing would be more.
5. If the company wants to allocates it fixed cost to number of units produced during that period the company would use absorption costing.
6. If the company wants to charge the fixed cost irrespective of production, then company would choice variable costing method.

For any queries please comment

If you are satisfied with the answer please click the LIKE Thumb