Q1. Some fixed manufacturing costs of the current period are deferred to future periods through
ending inventory under variable costing.
True
False
Q2. If normal costing is used when preparing an absorption costing income statement, the fixed
manufacturing overhead assigned to inventory is based on a predetermined fixed manufacturing
overhead rate.
True
False
Q3. Accounting for fixed manufacturing overhead is the only difference between variable and
absorption costing.
True
False
Q4. Under absorption costing, the value of a unit of a product includes all product costs.
True
False
Q5. The use of variable costing is consistent with cost-volume-profit analysis.
True
False
Q6. Variable costing is the approach used for external reporting under generally accepted
accounting principles.
True
False
Q7. Net income under variable costing is unaffected by changes in production levels.
True
False
Q8. Throughput costing is also called super absorption costing.
True
False
Revised Summer 2015
Page 1 of 21
VARIABLE COSTING
Key Terms and Concepts to Know
Variable vs. Absorption Costing
Absorption Costing is required by GAAP for external reporting purposes. This is the
costing method used for the traditional income statement.
Absorption costing classifies costs based on their function: product or period costs.
Variable Costing is often used for internal decision-making. This is the costing
method used for the contribution format income statement.
Variable costing classifies costs based on their behavior when the activity level
changes: variable or fixed costs.
The difference between the two methods is how they account for fixed
manufacturing overhead.
Product Costs:
Product costs are the manufacturing costs incurred to produce the products to be
sold.
Product costs under absorption costing include both manufacturing costs.
Product costs under variable costing include only variable manufacturing costs.
Absorption costing accounts for fixed manufacturing overhead as a product cost.
Variable costing accounts for fixed manufacturing overhead as a period cost.
Period Costs:
Period costs are the non-manufacturing costs incurred to operate the company.
Period costs are accounted for as expenses in the period incurred.
Absorption costing accounts for both variable and fixed non-manufacturing costs,
i.e., selling and administrative costs as period costs.
Variable costing accounts for both variable and fixed non-manufacturing costs,
i.e., selling and administrative costs, and fixed manufacturing overhead as period
costs.