Question

In comparing the absorption and variable cost methods, which of the following statements is true except?

1) The absorption cost method includes both fixed and variable costs in the cost of production.
2) The variable cost method only includes variable costs in the cost of production.
3) The absorption cost method is more accurate in determining the cost per unit of production.
4) The variable cost method is simpler to calculate and understand.

Answer 1

The incorrect statement is that the absorption cost method is more accurate in determining the cost per unit of production. Absorption costing includes both fixed and variable costs, while variable costing includes only variable costs.

Step-by-step explanation:

The question asks about the differences between absorption costing and variable costing methods in managerial accounting. Under absorption costing, both fixed and variable production costs are included in the cost of production, whereas the variable costing method includes only variable production costs. The statement 'The absorption cost method is more accurate in determining the cost per unit of production' is incorrect, as neither method is inherently more accurate—they simply allocate costs differently. Absorption costing allocates all production costs to the product, while variable costing only includes variable costs, making fixed costs a period cost. Due to this, absorption costing can lead to different net income results when inventory levels fluctuate. In contrast, variable costing is simpler and can provide clearer insights into how additional units of production will affect total costs and profits.