Variable Costing: A Tool for Management

These flashcards cover key concepts related to variable costing and absorption costing as discussed in Chapter 6 of the Managerial Accounting notes.

What is the primary difference between variable costing and absorption costing?

Variable costing includes only variable manufacturing costs as product costs, while absorption costing includes both variable and fixed manufacturing costs.

What are the components included in variable costing?

Direct materials, direct labor, and variable manufacturing overhead.

How are fixed manufacturing overhead costs treated under variable costing?

Fixed manufacturing overhead costs are treated as period costs and are expensed in the period incurred.

What formula is used to reconcile net operating incomes between variable costing and absorption costing?

Variable costing net operating income plus deferred fixed manufacturing overhead costs equals absorption costing net operating income.

How does normal costing differ from actual costing?

Normal costing uses actual direct material and labor costs but estimated overhead costs, while actual costing uses actual costs for all components.

What are the main costs that comprise total product costs under absorption costing?

All manufacturing costs including direct materials, direct labor, variable manufacturing overhead, and fixed manufacturing overhead.

What is the contribution margin in variable costing?

Sales minus total variable costs (variable cost of goods sold and variable selling and administrative expenses).

What is the purpose of preparing income statements using both costing methods?

To analyze differences in net operating income and understand the impact of costing methods on financial reporting.

What determines the highest values for work in process and finished goods inventories?

Absorption costing typically produces higher inventory values than variable costing.

What is the unit product cost under absorption costing?

Unit product cost under absorption costing includes all production costs, both variable and fixed.