Definition of Absorption CostingAbsorption costing is a cost accounting method (required by US GAAP) in which a manufacturer must assign fixed manufacturing overhead costs to the goods it produces. Therefore, the goods that are in inventory as well as the goods that have been sold will have "absorbed" the fixed manufacturing overhead costs (as well as the costs of variable manufacturing overhead, direct labor, and direct materials). Show
Fixed manufacturing overhead costs are usually incurred in large amounts (depreciation, salaries of manufacturing supervisors, etc.) that are then assigned (allocated or applied) in small increments to all of the products manufactured. If more units are manufactured, the fixed manufacturing overhead cost per unit becomes smaller. When the units are sold, the gross profit per unit will be larger and the net income will be larger. Example of Absorption Costing Causing an Increase in Net IncomeAssume a company has no beginning inventory and it plans to manufacture 100,000 units. Also assume that its annual fixed manufacturing overhead costs are $600,000. If 100,000 units are manufactured, the fixed manufacturing overhead cost per unit will be $6 ($600,000 divided by 100,000 units). If the 100,000 units are sold for $20 each, the income statement will report sales revenues of $2,000,000 and its cost of goods sold will include $600,000 of fixed manufacturing overhead. Now let's assume that the fixed manufacturing overhead costs remain at $600,000 but the company decides to manufacture 120,000 units (even though sales are expected to be only 100,000 units). In this situation, the fixed manufacturing overhead cost per unit will be applied at a rate of $5 per unit ($600,000/120,000 units manufactured). Since the sales remain at $2,000,000 (100,000 units X $20) but the cost of goods sold will include only $500,000 of fixed manufacturing overhead costs (100,000 units sold X $5), the gross profit will be $100,000 larger. The reason for the additional $100,000 in gross profit is that each of the additional 20,000 units in inventory have absorbed (been assigned) $5 of fixed manufacturing overhead costs. Asked by user on coursehero.com Question 1 Which of the following statements is correct? a. When production is not equal to sales, income under absorption costing differs from income under variable costing due to the difference in treatment of the fixed overhead cost under the two costing methods b. In absorption costing system, fixed overhead cost is treated as period cost. c. In variable costing system, fixed overhead cost is included as part of the cost of inventory d.
In a variable costing income statement, sales revenue is typically higher than absorption costing income statement Question 2 Which of the following statements is true? a. Income under absorption costing is always greater than income under variable costing b. Depreciation expense is always a period cost c. Selling and administrative costs, whether variable or fixed, is always treated as period costs under both absorption and variable costing system d. Depreciation expense is always a product
cost Question 3 If production is less than sales in unit, then absorption costing net income will generally be a. Less than expected b. Equal to variable costing net income c. Less than variable costing net income d. Greater than variable costing net income Question 4 If a firm uses variable costing a. It calculates an idle facility variation b. Its profit fluctuates with sales c. Its product cost per unit changes because of changes in the number of units produced d. Its product costs include
variable selling and administrative costs Question 5 The inventory costing method that treats direct manufacturing costs and indirect manufacturing cost, both variable and fixed, as inventoriable cost is called a. Conversion costing b. Perpetual inventory c. Variable costing d. Absorption costing Question 6 Which of the following statements regarding absorption and variable costing is correct? a. Absorption costing results in higher income when finished goods inventory increases b. Variable
manufacturing costs are lower under absorption costing c. Profits are always the same under the two costing methods d. Overhead costs are treated in the same manner under both variable and absorption costing methods. Question 7 Which of the following must be known about a production process to institute a variable costing system? a. Standard quantities and prices for all production inputs b. The direct and indirect costs related to production c. The variable and fixed components of manufacturing
costs d. The capacity level or denominator level to be used in allocating fixed overhead costs Question 8 What costs are treated as product cost under variable costing a. All manufacturing costs b. Only variable production costs c. All direct costs only d. All variable costs Question 9 Which of the following costing methods is not acceptable for external reporting? a. Process costing b. Activity-based costing c. Absorption costing d. Variable costing Question 11 Income under absorption costing
may differ from income under variable costing. The difference in income between the two costing methods is equal to the change of the quantity of all units a. Produced multiplied by the variable manufacturing cost per unit b. Sold multiplied by the selling price per unit c. Sold multiplied by the fixed factory overhead cost per unit d. In inventory multiplied by the fixed factory overhead cost per unit Question 12 Net income computed using absorption costing can be reconciled to net income
computed using variable costing by computing the difference between a. The product cost per unit under the two costing methods b. The gross profit under absorption costing and contribution margin under variable costing c. The selling price under two costing method d. Inventoried fixed factory overhead costs in the beginning and ending finished goods inventories Question 13 Which of the following statements is correct? a. Unit variable costs change directly with the cost driver or activity level
b. Gross margin and contribution margin are the same c. One inherent simplifying assumption in CVP analysis is productions equals sales d. Contribution margin is the excess of sales over variable costs, and this is the amount available for the recovery of fixed assets and generation of profit Question 14 The type of costing system that will provide the best information for CVP and Break-even analysis if inventories are expected to change is a. Job order costing b. Variable costing c. Process
costing d. Absorption Costing Question 15 Result of income are the same in both absorption and variable costing methods when a. When variable overhead cost per unit are the same. b. When Sales exceeds production c. Production exceeds sales d. Production and sales are the same Answered by user on coursehero.com um dolor sit amet, consectetur adipiscing elit. Nam lacinia pulvinar tortor nec facilisis. Pellentesque dapibus efficitur laoreet. Nam risus ante, dapibus a molestie consequat, ultrices ac magna. Fusce dui lectus, congue vel laoreet ac, dictum vitae odio. Donec aliquet. Lorem ipsum dolor sit amet, consectetur adipiscing elit. Nam lacinia pulvinar tortor nec facilisis. Pel  Unlock access to this and over Have an account? Log In Step-by-step explanationum dolor sit amet, consectetur adipiscing elit. Nam lacinia pulvinar tortor nec facilisis. Pellentesque dapibus efficitur laoreet. Nam risus ante, dapibus a molestie consequat, ultrices ac magna. Fusce dui lectus, congue v When units produced equals units sold income under absorption costing will be?(1) When units produced equals units sold, profit is the same for both costing approaches. (2) When units produced is greater than units sold, absorption costing yields the highest profit.
What happens when production is greater than sales?Explanation: If production exceeds sales, the profit under absorption costing is higher as compared to variable costing. This is due to the deferral of fixed manufacturing overhead costs to the next period in ending inventory, leading to reduced cost of goods sold for the current period and hence a higher profit.
When production is lower than sales variable costing net income is lower than absorption costing net income?When production is less than sales for the period, absorption costing net operating income will generally be less than variable costing net operating income.
How do you calculate income under absorption costing?Both begin with gross sales and end with net operating income for the period. However, the absorption costing income statement first subtracts the cost of goods sold from sales to calculate gross margin. After that, selling and administrative expenses are subtracted to find net income.
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