Absorption costing is more compatible with cost-volume-profit analysis than is variable costing.

Question

Quizplus · Accepted Answer

Variable costing and absorption costing differ in their treatment of fixed manufacturing overhead costs. Under variable costing, fixed manufacturing overhead costs are treated as period expenses and are not included in the product cost. Instead, these costs are expensed in the period in which they are incurred. On the other hand, absorption costing includes fixed manufacturing overhead costs in the product cost and allocates them to units produced.

To compute the unit product cost under each method, variable costing only includes variable manufacturing costs such as direct materials, direct labor, and variable overhead. Meanwhile, absorption costing includes both variable and fixed manufacturing costs (such as rent, depreciation, and property taxes) in the product cost.

In summary, absorption costing is more compatible with cost-volume-profit analysis because it includes all manufacturing costs in the product cost, which is necessary for determining the break-even point and calculating the contribution margin.

Absorption Costing Is More Compatible with Cost-Volume-Profit Analysis Than Is