Question

Absorption vs. Variable

Operating income is one of the most important items reported by a company. Depending on the decision-making needs of management, operating income can be determined using absorption costing or variable costing.

Select whether the following characteristics are most often associated with absorption costing or variable costing.

Required under generally accepted accounting principles (GAAP)	Absorption Costing
Often used for internal use in decision making	Variable Costing
Cost of goods manufactured includes only variable manufacturing costs	Variable Costing
Used in reports prepared for external users	Absorption Costing
Fixed factory overhead costs are not part of cost of goods manufactured	Variable Costing
Both fixed and variable factory costs are included in cost of goods sold and inventory

Answer 1

Required under generally accepted accounting principles (GAAP)----Absorption Costing

Often used for internal use in decision making------Variable Costing

Cost of goods manufactured includes only variable manufacturing costs-----Variable Costing

Used in reports prepared for external users-----Absorption Costing

Fixed factory overhead costs are not part of cost of goods manufactured----Variable Costing

Both fixed and variable factory costs are included in cost of goods sold and inventory-----Absorption costing

.

.

Variable costing treats fixed manufacturing overhead as a period cost whereas the absorption costing treats the same as product cost. GAAP requires the companies to report the income statement under absorption costing.