1. What is the basic difference between absorption costing and variable costing?
2. Why is variable costing a better support for short-term planning and decision making than absorption costing?
3. If production and sales are equal, which method would you expect to show the higher operating income, variable costing or absorption costing? Why?
4. If production exceeds sales, which method would you expect to show the higher operating income, variable costing or absorption costing? Why?
5. If fixed manufacturing overhead costs are released from inventory under absorption costing, what does this tell you about the level of production in relation to the level of sales?
6. Delone Industries had $125,000 in sales and reported a $75,000 profit in its annual report to shareholders. According to a CVP analysis prepared for management's use, $125,000 in sales is the break-even point for the company. Did the company's inventory level increase, decrease, or remain unchanged? Explain.
7. How is the use of variable costing limited?
8. How does lean production reduce or eliminate the difference in reported operating income between absorption and variable costing?