Chapter 21, Problem 22DQ

To determine

Absorption costing and Variable costing both are two different costing methods in which cost of product is allocated to that product on different basis of allocation.

Variable costing method is also known as direct costing method or marginal costing. Under variable costing method only variable production cost is assigned to the inventory or cost of goods sold. Variable production cost generally includes direct material, direct labor, direct expenses and variable factory overheads. The contribution margin is calculated by deducting all direct costs and variable manufacturing costs from sales.

Absorption costing method is also known as Full costing method. Under this method all direct costs and both fixed and variable factory overheads are applied to the product. Under this method gross profit is calculated by deducting all the direct costs, all fixed and variable overheads such as factory overheads, sales and general administrative expenses both fixed and variable from sales.

In the given question we have to describe the procedures to be followed for variable costing income to be converted to absorption costing income.