Do differences in production and sales levels affect income under absorption and variable costing?

Question:

Do differences in production and sales levels affect income under absorption and variable costing?

Variable Costing and Absorption Costing:

Variable costing is a costing method that treats fixed manufacturing overhead as a period cost while under absorption costing, the fixed manufacturing overhead is treated as a product cost.

Answer and Explanation:

The difference in production and sales level will affect the income under absorption costing but not under variable costing. Why is this so? The reason that absorption costing net income will be affected by the difference in production and sales level is due to the way fixed manufacturing overhead is being recognized. Under the absorption costing, fixed manufacturing overhead is treated as product cost therefore the total fixed manufacturing overhead recognized in the income statement will vary depending on the level of production and the sales reported. If production is greater than sales, the net income under absorption costing will be higher than variable costing since fixed manufacturing overhead recognized in the income statement is lesser than the actual fixed manufacturing overhead incurred.

Under variable costing, fixed manufacturing overhead is treated as period cost, therefore expensed outright.


Learn more about this topic:

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Variable Costing: Method, Formula & Advantages

from Financial Accounting: Help and Review

Chapter 13 / Lesson 5
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