Question: What exactly is absorption costing vs. variable costing?
In your opinion, describe whether you think overproducing is an ethical practice and why or why not. Include discussion of which stakeholders might react, and how they would react if they knew about this practice.
Using the following data, calculate the difference between reported income and unit costs under absorption and variable costing by answering these questions:
- How many units of production were produced? shipped? left in inventory?
- What is this firm's predetermined fixed overhead rate?
- How much of the firms fixed costs stayed in inventory under variable costing? under absorption costing?
- Calculate the unit cost using variable costing. using absorption costing.
- Based on this firm's predetermined fixed overhead rate, how much of the firms fixed costs ended up on the year's COGS and income statement under variable costing? under absorption costing?
Under which method (variable or absorption costing), will reported profits be higher? Explain why.
Data
Budgeted and Actual fixed costs
$2,000,000
Budgeted unit volume to be produced
20,000
Budgeted unit volume sold
20,000
Actual variable costs
$600,000
Actual unit volume sold
20,000
Actual units produced
21,000
Beginning of year inventory
0
End of year inventory
?
What exactly is absorption costing vs. variable costing?