Concept explainers
(A.1)
Absorption Costing
Absorption costing is compulsory under Generally Accepted Accounting Principles (GAAP) for financial statements circulated to the external users. Under absorption costing, the cost of goods manufactured includes direct materials, direct labor, and factory
Variable Costing
Managers frequently use variable costing for internal purposes for taking decision making. The cost of goods manufactured includes direct materials, direct labor, and variable factory overhead. Fixed factory overhead treated as period (fixed) expense.
To Prepare: The absorption costing format for units manufactured for 40,000 units and 50,000 units of Incorporation M.
(B)
To Identify: The reason for the difference in income from operations reported for the two levels of production by the absorption costing income statement.
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