Question

How might managers build up finished-goods inventory if they use absorption costing? Explain. 2 sentences maximum.

How does income differ under variable and absorption costing? 4 sentences maximum.

Answer 1

Under absorption costing both fixed and variable production costs are included in the valuation of finised goods inventory since the cost classification is on the basis of function rather than variability. Administration, Selling and Distribution overheads are treated as period costs.

The income differs according to the finished goods inventory levels:

If sales quantity is equal to the production quantity, there will be no difference in the income under variable and absorption costing

If sales quanity is more than the production quantity the closing stock will be lower and profits under absorption costing will be less

If sales quantity is less than production quantity the closing stock will be higher and profits under absorption costing will be more