Question

15-1: Which of the following items account for the difference in income between Variable Costing and Absorption Costing when inventory levels are changing? (Check all that apply.)

(A)          Fixed manufacturing costs    

(B)          Fixed non-manufacturing costs

(C)          Variable manufacturing costs  

(D)          Variable non-manufacturing costs

15-5: The Impatients-To-Go Silk Flower Company began operations on January 1, 2004. Which of the following circumstances ensures that the company’s net income will be the same under Absorption Costing as under Variable Costing for 2005, its second year of operations?

(I)           The company has no inventory on January 1, 2005, and no inventory on December 31, 2005.

(II)          The company incurred no fixed manufacturing overhead in 2005, and has no inventory on December 31, 2005.

(III)         The company incurred no fixed manufacturing overhead in 2004, and has no inventory on December 31, 2005.

(A)          I only

(B)          I and II are each sufficient

(C)          I and III are each sufficient

(D)          I, II and III are each sufficient

Answer 1

Variable and Absorption costing vary in how they tackle fixed manufacturing overhead.

Fixed manufacturing overhead is considered as the product cost in absorption method which means it is an asset until it’s sold

Fixed manufacturing overhead is considered as the period cost in variable method which means it is expensed in income statement.

Therefore, option A is correct.

Option C is correct.

Only 1 and 3 is sufficient telling about opening inventory, its ending balance and overhead incurred in the year.