Concept explainers
Differences in operating income between variable costing and absorption costing are due solely to accounting for fixed costs. Do you agree? Explain.
Variable Costing:
The variable costing is a method used to allocate the fixed manufacturing overhead by a company. It allocates these overheads to the period of production and not to the inventory left unsold or ending inventory.
Absorption Costing:
The absorption costing is a method used to allocate the fixed manufacturing overhead by a company. It allocates these overheads based on the inventory produced and inventory sold. It is based on the approach that the unsold inventory also consist some fixed manufacturing overhead incurred during a period.
To explain: The basis of differences in operating income between variable costing and absorption costing.
Answer to Problem 9.1Q
The difference is due to the accounting of fixed manufacturing costs and the valuation of inventory during a production period.
Explanation of Solution
- The fixed manufacturing overhead is allocated to total unit produced during a period under the absorption costing.
- The fixed manufacturing overhead is allocated to total unit sold during a period under the variable costing.
- It affects the total cost of goods sold and the inventory valuation.
So, the statement that fixed costs are the reason for difference in operating income is not complete as it is also affected by the inventory valuation.
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