Variable costing and absorption costing, the Z-Var Corporation. (R. Marple, adapted) It is the end of 2017. Z-Var Corporation began operations in January 2016. The company is so named because it has no variable costs (Zero VARiable). All its costs are fixed; they do not vary with output. Z-Var Corp. is located on the bank of a river and has its own hydroelectric plant to supply power, light, and heat. The company manufactures a synthetic fertilizer from air and river water and sells its product at a price that is not expected to change. It has a small staff of employees, all paid fixed annual salaries. The output of the plant can be increased or decreased by pressing a few buttons on a keyboard. The following budgeted and actual data are for the operations of Z-Var. The company uses budgeted production as the denominator level and write
Variable vs. Absorption Costing
. Absorption Costing is required by GAAP for external reporting purposes. This is the
costing method used for the traditional income statement.
. Absorption costing classifies costs based on their function: product or period costs.
. Variable Costing is often used for internal decision-making. This is the costing
method used for the contribution format income statement.Variable costing classifies costs based on their behavior when the activity level
changes: variable or fixed costs.
. The difference between the two methods is how they account for fixed
manufacturing overhead.
Product Costs:
. Product costs are the manufacturing costs incurred to produce the products to be
sold.
. Product costs under absorption costing include both manufacturing costs.
. Product costs under variable costing include only variable manufacturing costs.
. Absorption costing accounts for fixed manufacturing overhead as a product cost.
. Variable costing accounts for fixed manufacturing overhead as a period cost.
Trending now
This is a popular solution!
Step by step
Solved in 2 steps
