Absorption and Variable Costing Are Two Different Methods of Measuring

question 12

Essay

Absorption and variable costing are two different methods of measuring income and costing inventory.
Required:
A.Product costs are defined as costs associated with the manufacturing process.How does the operational definition of product cost differ between absorption costing and variable costing?
A.The sole difference between the two methods is that fixed manufacturing overhead costs are defined as a product cost under absorption costing and as a period cost under variable costing.
B.An absorption-costing income statement will report gross profit or gross margin whereas a variable-costing income statement will report contribution margin.What is the difference between these terms?
B.Gross profit (gross margin)is the difference between sales and cost of goods solD.Cost of goods sold includes variable and fixed manufacturing costs.Contribution margin,on the other hand,is the difference between sales and variable expenses,namely,variable cost of goods sold and variable operating expenses.Fixed costs are ignored when calculating the contribution margin.

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Definitions:

Allocative Efficiency

an optimal distribution of resources in an economy, ensuring that goods and services are distributed according to consumer preferences.

Per-Capita Output

The average production of goods or services per person within a geographical area or country.

Developing Countries

Nations with a lower living standard, underdeveloped industrial base, and low Human Development Index (HDI) relative to other countries.

Modernize Economies

The process of adopting new technologies, implementing policy reforms, and updating infrastructures to improve a country's economic performance and productivity.