In Income Statements Prepared Under Absorption Costing and Variable Costing

question 12

Multiple Choice

In income statements prepared under absorption costing and variable costing, where would you find the terms contribution margin and gross profit?

• A)The difference is expensed as a period cost the way variable costing immediately expenses fixed overhead as a period cost.
• B)The difference is over or under-applied overhead that if immaterial, will be closed out to cost of goods sold at year end.
• C)The difference will be held in inventory and taken to cost of goods sold when the units are sold next year.
• D)There is no difference.

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Definitions:

Net Sales

The total revenue from sales transactions after deducting returns, allowances for damaged or missing goods, and discounts.

Return on Total Assets

A financial ratio that measures a company's efficiency in generating profit from its assets, calculated by dividing net income by total assets.

Net Income

Refers to the profit that remains after all operating expenses, interest, taxes, and preferred stock dividends have been deducted from total revenues.

Average Total Assets

A financial metric calculated by taking the average of a company’s total assets at the beginning and the end of an accounting period to assess overall asset efficiency.