Question

How do the levels of production volume and sales volume interact when using direct costing? How does it affect the outcome of an absorption costing statement if production volume exceeds sales volume? What if production and sales volumes are the same? in simple words please

Answer 1

Direct costing method used in costing is very effective method for short term decision making.
This method uses the costing techniques for production of goods, which only considered as variable costs. Certain fixed costs are not considered in direct costing.

Now, while using direct costing the levels of production volume and sales volume work together then according to sales volume, the production volume is achieved and profits are increased over time.

If the production volume exceeds the sales volume there is decrease in profits as the finished products become inventory and the cost of their production is already inccurd which is to be stated in income statement.

If the production and sales volume are same then the company earns good profits. Also, the income statement will show exact profits which are earned.