Term
| Using the variable costing method, which of the following costs are assigned to inventory? |
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Definition
| Variable costing assigns only variable manufacturing costs to inventory. Variable manufacturing costs include direct materials, direct labor, and variable factory overhead. Fixed factory overhead is treated as a period expense. Variable selling and administrative costs, although deducted to arrive at a contribution margin, are not included as inventoriable costs, but are expensed in full each period. |
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Term
| The absorption costing method includes in work in process and finished goods inventories: |
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Definition
| Absorption costing includes both fixed and variable manufacturing costs in product costs, and factory overhead costs are included in work in process and finished goods inventories. |
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Term
| In an income statement prepared as an internal report using the direct (variable) costing method, fixed selling and administrative expenses would |
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Definition
| Be used in the computation of operating income, but not in the computation of the contribution margin. |
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Term
| In an income statement prepared as an internal report using the direct (variable) costing method, fixed selling and administrative expenses would |
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Definition
Be used in the computation of operating income, but not in the computation of the contribution margin.
- Variable Manufacturing
- Variable Selling and Administrative
= Contribution Margin
- Fixed Manufacturing
- Fixed Selling and Administration
= Operating Income |
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Term
| Which of the following statements is correct regarding the difference between the absorption costing and variable costing methods? |
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Definition
| When production is greater than sales, absorption costing income is greater than variable costing income. This is why managers are often tempted to overproduce. |
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Term
| How does absorption costing (AC) v. direct costing (DC) effect inventory valuation? |
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Definition
| Inventory using AC will always be greater than inventory using DC because AC includes fixed product overhead costs. |
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Term
| How is absorption costing (AC) fundamentally different from direct costing (DC)? |
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Definition
| The difference between AC and DC can be fundamentally isolated to the treatment of fixed manufacturing overhead. For AC it is a product cost and with DC it is a period cost. |
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Term
| What types of product costs are included in the direct costing model? |
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Definition
| Only variable manufacturing costs are included in product costs. |
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Term
| How is the contribution margin calculated using the direct costing method? |
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Definition
| Contribution margin is equal to revenue minus all variable costs, including period costs. |
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Term
| Which costing method is required for compliance reporting (i.e., financial and tax reporting)? |
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Definition
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