Question

LO 6.5Product costs under variable costing are typically:

higher than under absorption costing
lower than under absorption costing
the same as with absorption costing
higher than absorption costing when inventory increases

Answer 1

Answer: lower than under absorption costing

Explanation:Product costs under variable costing are usually lower due to the composition of the cost calculation.

Under variable costing, the cost elements are direct material, direct labour and variable overheads while under the absorption costing method the cost calculation will include direct materials, direct labour, variable overheads and fixed overheads.

simply put is to say that variable costing calculation is lower than absorption costing calculation because absorption costing calculation includes fixed overheads while variable costing calculation does not.