Question

1. How is Variable Costing different from Absorption Costing?

2. Which would result in a higher product cost, Variable Costing or Absorbtion Costing, and why?

3. What is a Segmented Income Statement?

Answer 1

Answer-1

Difference Between Variable Costing and Absorption costing:-

• Meaning- Variable Costing refers to the Costing method in which price of goods and services is determined by adding variable costs and not fixed costs which results in higher net income on the other hand Absorption costing refers to the Costing method in which product costs is determined by all costs like fixed costs and variable costs, related to production of goods and services.
• Income- As we know Variable Costing doesn't add fixed costs so, its net income increases on the other hand Absorption costing shows all the production costs including all fixed costs and variable costs so, its net income is less than variable costing.
• Names - Variable Costing is known as direct costing as it shows only variable costs and Absorption costing is known as full costing as it shows all the costs.
• Uses- The information of Variable Costing method is mostly used by internal management for decision making but the information of Absorption costing method is used by both internal and external management for decision making and many other useful works.

Answer-2

Absorption costing results in higher product cost as absorption costing includes all the costs whether it is fixed cost or variable costs. It includes direct materials,labour, fixed manufacturing overhead etc which increases there product cost. On the other hand Variable Costing doesn't include various fixed costs,it just add variable costs and that's why it's product cost is lesser than absorption costing.

Answer-3

Segmented Income Statement is a management accounting tool which divides or break the income statement into various segments for better understanding. This tool is used where more than one product is manufactured, purchased or sells. Income statement is broken on the basis of different costs etc.