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45
Part (A)
Absorption Variable
Costing Costing
Part (B)
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Part (C)
Reconciliation of Income under the two methods by listing the two key places where Income Statements Differ
Part (D)
Reconciliation of Income reported under the two methods using the shortcut method
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Important Points:
1) In Variable Costing, closing stocks are valued at marginal production cost. And the fixed costs are charged in full against the profit as a
Period cost.
2) In Absorption Costing, closing stocks are valued at full production cost, and include a share of fixed production costs. Thus the fixed
manufacturing overheads are treated as Product cost.
ents Differ
gainst the profit as a
Answer Case 1
When the units produced exceed units sold, income is higher under Absorption Costing. This is because a part of fixed manufacturing overheads
goes to Closing stock in Absorption Costing, and therefore Cost of Goods sold is reduced. On the other hand Variable Costing treats fixed
manufacturing overheads as period cost, so all the cost is charged to current period. Thus the income under Absorption Costing is higher when
units produced exceed units sold.
Answer Case 2
When the units produced are equal to units sold, income is under Absorption Costing and Variable Costing are the same. This is because same
amount of fixed manufacturing overheads are included in profit & loss if the Production and Sales are same, and thus income under both
methods remains same.
Answer Case 3
When the units sold exceed units produced, income is higher under Variable Costing. This is because of the reason that additional fixed cost is
absorbed in Cost of Sales under Absorption Costing. Therefore income under Variable costing is higer if units sold exceed units produced.
When the units sold exceed units produced, income is higher under Variable Costing. This is because of the reason that additional fixed cost is
absorbed in Cost of Sales under Absorption Costing. Therefore income under Variable costing is higer if units sold exceed units produced.
Part (B)
Case 1
Absorption
Variable Costing
Costing
Case 2
Absorption
Variable Costing
Costing
Sale $ 6,300,000 Sale $ 6,300,000
Cost of Goods Sold (5,700,000) Variable Cost (3,500,000)
Income $ 600,000 Contribution Margin $ 2,800,000
FixedCost (2,200,000)
Income $ 600,000
Thus Income under Absorption Costing and Variable Costing are same.
Case 3
Absorption
Variable Costing
Costing
Sale $ 14,490,000 Sale $ 14,490,000
Cost of Goods Sold (10,580,000) Variable Cost (8,050,000)
Income $ 3,910,000 Contribution Margin $ 6,440,000
FixedCost (2,200,000)
Income $ 4,240,000
its produced.