[infinity]

I didn’t quite fully understand this flash card. How I understand the difference between absorption costing and variable costing is how the fixed manufacturing overhead is treated (as a product cost under absorption costing; a period cost under variable costing). The inventory value is higher under the absorption method and expensed when sold(therefore cost of sales), which also causes the current ratio to increase. Absorption costing is used by external and internal parties whereas variable costing is used for internal parties. Variable costing focuses on variable costs directly. Sales minus variable costs give contribution margin. What’s the fixed costs part about? And for absorption costing, the SG&A is for?

Here’s the flashcard:

How does Absorption Costing compare to Variable Costing?

Absorption Costing – External Use- Cost of Sales- Gross Profit- SG&A

Variable Costing – Internal Use- Variable Costs- Contribution Margin- Fixed Costs

BEC 74

Never give up, never surrender.

[M.O.D.]

It is to calculate the net income.

Abs costing net income = Sales – cost of sales (=G/P) – SG&A (period cost)

Var cost net income = Sales – variable costs (var Mfg and var SG&A) (=Contribution margin) – fixed costs (fixed mfg and fixed SG&A are period costs)

BA Mathematics, UC Berkeley
Certificates in CPA and EA preparation, College of San Mateo
CMA I 420, II 470
FAR 91, AUD Feb 2015 (Gleim self-study)

[M.O.D.]

It is to calculate the net income.

Abs costing net income = Sales – cost of sales (=G/P) – SG&A (period cost)

Var cost net income = Sales – variable costs (var Mfg and var SG&A) (=Contribution margin) – fixed costs (fixed mfg and fixed SG&A are period costs)

BA Mathematics, UC Berkeley
Certificates in CPA and EA preparation, College of San Mateo
CMA I 420, II 470
FAR 91, AUD Feb 2015 (Gleim self-study)

[infinity]

Thank you for that important missing nugget link

BEC 74

Never give up, never surrender.

[infinity]

Thank you for that important missing nugget link

BEC 74

Never give up, never surrender.

[Author]

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