Question

1.Explain the difference between variable and full costing.

2.Explain why income calculated under full absorption costing will be greater than income calculated under variable costing when production exceeds sales. Explain how a manufacturing company can "bury" fixed manufacturing costs in ending inventory under full absorption costing.

3.If the fixed manufacturing overhead cost per unit under full costing is multiplied by the change in inventory between the beginning and ending of the period, what does the resulting number represent?

Answer 1

1.

s.no. variable costing full costing 1 variable costing only includes the variable costs directly related to production. Companies that use variable costing keep overhead and other fixed-cost operating expensesseparate from production costs. Full costing is also called absorption costing.Absorption costing includes all costs, including fixed costs, in figuring the cost of production 2 Variable costing can make it more difficult to determine ideal pricing, since it does not directly consider all of the costs the company has to cover to be profitable costs directly associated with production, variable costing makes it easier for a company to compare the potential profitability of manufacturing one product over another.

3	variable costing system is used, the fixed cost (both manufacturing and non-manufacturing) is treated as a period or capacity cost and is, therefore, not included in the product cost.	Under absorption costing system, the product cost consists of all variable as well as all fixed manufacturing costs i.e., direct materials, direct labor and factory overhead (FOH)

Ans 2.

When production exceeds sales, part of fixed manufacturing overhead will remainin inventory. In variable costing, the entire amount of fixed manufacturing overhead will be expensed since it is treated as a period cost. Thus, income computed under full costing will exceed income computed under variable costing.

Fixed production costs per unit are calculated by dividing total fixed production costs by the number of units produced. Each unit in ending inventory then receives this amount per unit. A company can “bury” fixed costs in inventory by overproducing. The more the company overproduces, the more fixed cost remainsin ending inventory relative to cost of goods sold.

Ans 3.

The resulting number represents absorption cost.