Question

Operating income is one of the most important items reported by a company. Depending on the decision-making needs of management, operating income can be determined using absorption costing or variable costing. Select whether the following characteristics are most often associated with absorption costing or variable costing.

a. Required under generally accepted accounting principles (GAAP)
b. Often used for internal use in decision making
c. Cost of goods manufactured includes only variable manufacturing costs
d. Used in reports prepared for external users
e. Fixed factory overhead costs are not part of cost of goods manufactured
f. Both fixed and variable factory costs are included in cost of goods sold and inventory

Answer 1

Determining Operating Income using Absorption Costing or Variable Costing

a. Absorption costing

b. Variable costing

c. Variable costing

d. Absorption costing

e. Variable costing

f. Absorption costing

Step-by-step explanation:

Absorption costing is also regarded as full costing. An income statement prepared using absorption costing includes both fixed and variable manufacturing costs in the costs of goods sold and ending inventory. Fixed manufacturing cost is not regarded as period cost that must be expensed in the period when it is incurred as some elements of the fixed cost are carried forward to the next accounting period through the ending inventory. This is unlike variable or marginal costing, where the fixed costs are expensed in the period they are incurred.