Please help analyzing the difference between Variable Costing vs. Absorption Costing!
How each is used and who uses? Give examples of each.
It has to be 500/more words synopsis with three/more sources!
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Variable Costing vs. Absorption Costing
Absorption costing is known as full costing, in which all manufacturing costs are allocated to products without considering whether they are fixed or variable. On the other hand, variable costing or marginal costing includes only variable costs in decision-making and excludes fixed manufacturing overheads as a period cost. Therefore, variable costing includes only variable manufacturing costs because fixed manufacturing costs are treated as period cost that is expensed in the period incurred, while absorption costing involves both variable and fixed manufacturing costs because all costs are involved in the production (Drury, 2008).
A company without any distinction between variable-cost and fixed-cost cannot use variable costing. For example, in internal reporting, some ...
The solution analyzes the difference between variable costing vs. absorption costing.
Variable Cost Analysis
Monrad Corporation uses variable costing for internal reporting purposes. Its preadjusted trial balance for the year ended December 31 shows:
Cost of goods sold (at variable cost) $750,000
Finished goods inventory (at variable cost) 75,000
Nonvariable product costs 462,000
An analysis shows that cost of goods sold represents 30,000 direct labor hours, and finished goods inventory 3,000 direct labor hours. Monrad feels that the best way of allocating a fair share of nonvariable production costs to products is on the basis of direct labor hours.
a. Prepare an adjusting entry that will put cost of goods sold and finished goods inventory on an absorption costing basis.
b. What will be the difference between pretax income on a variable costing basis and on an absorption costing basis (assume zero beginning of year finished goods inventory)?
c. What will be the December 31 amount of finished goods inventory on an absorption costing basis?