Concept explainers
To discuss:
The difference in absorption costing and variable costing
Absorption costing and variable costing are two different methods of determining cost of a product.

Explanation of Solution
Solution:
In absorption costing we are charging fixed manufacturing
Explanations:
Absorption Costing:- In this type of costing method, costs are absorbed in the product units irrespective of their nature. In other words, all fixed and variable costs are absorbed in the products. It is based on the principle that costs should be charged or absorbed to whatever is being costed, whether it is a cost unit, cost center.
Variable Costing: - In Variable costing, distinction is made between expenses which vary in relation to level of production and those that do not vary linked to Production. The expenses which vary in relation to production are called variable expenses and those which do not change with level of production are called Fixed Expenses. Sales − Variable expenses = contribution is the key to calculate break Even level and ascertain margin of safety.
In case of Absorption costing our cost format is as under:
Detail | Amount |
Sales | |
Cost of Goods Sold | |
Gross Profit | |
Selling and Administrative Expenses | |
Net Profit |
In case of variable costing cost format is as under:
Details | Amount |
Sales | |
Variable cost | |
Contribution | |
Fixed Cost | |
Net Profit |
In case of Absorption costing all overheads are classified either as Production Overheads, Administrative Overheads, Selling and Distribution Overheads. Further distinction is not made whether they are Fixed or variable.
In case of variable costing − all overheads are classified between Fixed or variable depending upon their variability in relation to production units.
In case of Absorption Costing −
In case of Variable costing − inventory valuation includes share of variable production overheads. Fixed production overheads are charged as period cost.
In absorption costing fixed manufacturing overheads are treated at Product cost and therefore also included in value of Inventory. In variable costing Fixed manufacturing overheads are treated as Period cost and not included in closing inventory valuation.
Want to see more full solutions like this?
Chapter 6 Solutions
MANAGERIAL ACCOUNTING CONNECT ACCESS
- Please don't use AI And give correct answer .arrow_forwardLouisa Pharmaceutical Company is a maker of drugs for high blood pressure and uses a process costing system. The following information pertains to the final department of Goodheart's blockbuster drug called Mintia. Beginning work-in-process (40% completed) 1,025 units Transferred-in 4,900 units Normal spoilage 445 units Abnormal spoilage 245 units Good units transferred out 4,500 units Ending work-in-process (1/3 completed) 735 units Conversion costs in beginning inventory $ 3,250 Current conversion costs $ 7,800 Louisa calculates separate costs of spoilage by computing both normal and abnormal spoiled units. Normal spoilage costs are reallocated to good units and abnormal spoilage costs are charged as a loss. The units of Mintia that are spoiled are the result of defects not discovered before inspection of finished units. Materials are added at the beginning of the process. Using the weighted-average method, answer the following question: What are the…arrow_forwardQuick answerarrow_forward
- Financial accounting questionarrow_forwardOn November 30, Sullivan Enterprises had Accounts Receivable of $145,600. During the month of December, the company received total payments of $175,000 from credit customers. The Accounts Receivable on December 31 was $98,200. What was the number of credit sales during December?arrow_forwardPaterson Manufacturing uses both standards and budgets. For the year, estimated production of Product Z is 620,000 units. The total estimated cost for materials and labor are $1,512,000 and $1,984,000, respectively. Compute the estimates for: (a) a standard cost per unit (b) a budgeted cost for total production (Round standard costs to 2 decimal places, e.g., $1.25.)arrow_forward
- AccountingAccountingISBN:9781337272094Author:WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.Publisher:Cengage Learning,Accounting Information SystemsAccountingISBN:9781337619202Author:Hall, James A.Publisher:Cengage Learning,
- Horngren's Cost Accounting: A Managerial Emphasis...AccountingISBN:9780134475585Author:Srikant M. Datar, Madhav V. RajanPublisher:PEARSONIntermediate AccountingAccountingISBN:9781259722660Author:J. David Spiceland, Mark W. Nelson, Wayne M ThomasPublisher:McGraw-Hill EducationFinancial and Managerial AccountingAccountingISBN:9781259726705Author:John J Wild, Ken W. Shaw, Barbara Chiappetta Fundamental Accounting PrinciplesPublisher:McGraw-Hill Education





