Question

Explain the difference between variable costing and absorption costing income statements. Provide income statements in both variable costing and absorption costing formats for an initial period and its successive period in a case where all manufactured products within the two periods are sold by the end of the second period, but number of units sold in the first period is less than the number of units manufactured in this period. What is the interesting observation in comparing the two types of income statements

Answer 1

The part of fixed manufacturing Overhead cost which is carried forward as part of closing inventory is the only difference in the profits of two methods.

Step-by-step explanation:

The difference is because of assigning of the fixed manufacturing Overhead cost to the finished products in Traditional Absorption Costing whereas variable charge the whole of the fixed manufacturing Overhead cost as a period cost which means it is not assigned to the product. So this is the only difference between the two methods.