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Emmie Palmer

Chapter 6 Discussion Questions

ACCT 203
1. What is the difference between absorption and variable costing?
Absorption costing is a method that includes all manufacturing costs
(direct materials, direct labor, and variable and fixed manufacturing
overhead) in unit product costs. Variable costing is a costing method
that includes only variable manufacturing costs (direct material, direct
labor, and variable manufacturing overhead) in product costs.
2. Are selling and administration expenses treated as product costs or
as period costs under variable costing?
They are treated as period costs.
3. Explain how fixed manufacturing overhead costs are shifted from
one period to another under absorption costing.
Costs are included as part of the costs to Work in Process inventories,
only when the units are sold do these costs flow through to the income
statement as part of cost of goods sold.
4. What are the arguments in favor of treating fixed manufacturing
overhead costs as product costs?
All manufacturing costs have to be assigned to products in order to
properly match the costs of producing units of product with their
revenues when they are sold.
5. What are the arguments in favor of treating fixed manufacturing
overhead costs as period costs?
Fixed manufacturing costs are not really the costs of the unit, but that
they are costs incurred to have the capacity to make products during a
certain period. These will be incurred even if nothing is made during
the period. If a unit is made or not the fixed costs will be the same and
since the fixed costs are not part of producing that particular unit they
should be charged to the current period.
6. If the units produced and the unit sales are equal, which method
would you expect to show the higher net operating income, variable or
absorption costing?
Net operating income should be the same under both because
inventory will remain the same so MOH costs cant be released in
inventory under absorption costing.
8. If fixed MOH costs are released from inventory under absorption
costing, what does that tell you about the level of production in
relation to the level of sales?

This says that inventories have decreased which means that units
produced were greater than units sold.

9. Under absorption costing, how is it possible to increase NI without

increasing sales?
This is accomplished by increasing the numbers of units produced.
When units produced is greater than units sold, inventories increase
and so will NI.
13. Distinguish between traceable cost and a common cost.
Common costs are a fixed cost that supports more than one business
segment, but is not traceable in whole or in part to any one of the
business segments. Traceable cost is a cost that is incurred because of
the existence of a particular business segment and that would be
eliminated if the segment were eliminated.
Traceable Cost: Product Managers Salary
Common Cost: Heating cost of a grocery store
14. Explain how the segment margin differs from the contribution
The segment margin is more useful in determining capacity for
example if a segment should be dropped or not. Contribution margin is
more useful in making short run changes in volume.
15. Why arent common costs allocated to segments under the
contribution approach?
Common cost will continue whether the segment exists or not. If
common costs are allocated to segments this will reduce the value of
the segment margin as a measure of long run segment profitability and
segment performance.