Question

Question 1: If a company calculated the final sales value of its various products that are manufactured and then subtracts out identified separable costs, what allocation method is it using? Explain how you reached the decision you reached.

Question 2: Indicate which of the following answers to the statement below represents the best choice, then support your view. If another student has already answered the question and you agree, then indicate why one of the other choices is incorrect. When production is equal to sales, which of the following is true?

A) No change occurs to inventories for either absorption costing or variable costing methods.

B) The use of absorption costing produces a higher net income than the use of variable costing.

C) The use of absorption costing produces a lower net income than the use of variable costing.

D) The use of absorption costing causes inventory value to increase more than they would through the use of variable costing.

Answer 1

1. Company is using Direct method of cost allocation as it is subtracting only those costs from sales value of the product which are associated with the product

2. When Production is equal to sales then Option A is true.

As production and sales are equal there is no difference in profit as per absorption and variable costing, profit will be same. Since there is no inventory as production and sales are equal hence no change in inventories under both costing methods.