Question

please answer both questions (4 & 5)

Answer 1

1.

a.)Contribution Margin is Revenues (-) Variable Costs whereas

b.)Gross Margin is Revenues (-) Total Costs (Production Costs only)

in a.) above only Variable Costs are considered in comparison to latter where fixed costs are also considered.

Further, former is a Marginal Costing Concept used for Short Term Decision Making,

whereas latter is profit analysis and is similar to absorption costing concept.

2. a. Here there won't be any difference between net income calculated under both the approaches as period costs won't have any impact.

2.b. Here net income under variable costing will be lower than the absorption costing as sales are lesser in amount than production and thus inventory is increasing.

2.c. vice versa of b above would hold true for higher sales than production, thereby variable costing net income being greater than absorption costing as inventory is decreasing.