What is absorption costing?

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Answer

Absorption costing is the traditional method of calculating product cost per unit.

Step by step solution

01

Meaning of absorption costing

Absorption costing is the traditional method of calculating product cost per unit and operating income. This method gives equal importance to fixed cost and does not believe in the concept of irrelevant cost or sunk cost.

02

Difference between variable and absorption costing

The main difference is absorption costing and variable costing is that the former method considers fixed manufacturing overhead cost as product cost, whereas the latter method considers it as period cost.

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Most popular questions from this chapter

Question: Preparing variable costing income statements, production less than sales

Refer to your answers to Exercise E21-16. In May 2018, ReVitalAde produced 22,000 cases of powdered drink mix and sold 23,000 cases, of which 1,000 were produced in April. The sales price was \(29, variable costs were \)12 per case (\(9 manufacturing and \)3 selling and administrative), and total fixed costs were \(100,000 (\)91,000 manufacturing and $9,000 selling and administrative).

Requirements

  1. Prepare the May income statement using variable costing.
  2. Determine the balance in the Finished Goods Inventory as of May 31.

Classifying costs Classify each cost by placing an X in the appropriate columns. The first cost is completed as an example.

Absorption Costing Variable Costing Product Cost Period Cost Product Cost Period cost

  1. Direct materials
  2. Direct labor
  3. Variable manufacturing overhead
  4. Fixed manufacturing overhead
  5. Variable selling and administrative costs
  6. Fixed selling and administrative cost

The Stark Company manufactures a product that is expected to incur \(20 per unit in variable production costs and sell for \)40 per unit. The sales commission is 10% of the sales price. Due to intense competition, Stark actually sold 200 units for \(38 per unit. The actual variable production costs incurred were \)23.75 per unit. Calculate the total contribution margin and contribution margin ratio at the expected price/costs and the actual price/costs. How might management use this information?

What are the two components that can affect contribution margin? Why is it important to investigate both?

When units produced are less than units sold, how does operating income differ between variable costing and absorption costing? Why

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