Discuss and Compare Absorption Costing Income Statements with Variable Costing

question 96

Essay

Discuss and compare absorption costing income statements with variable costing income statements. In your discussion, address the following questions:
a. What is the main difference between the two methods?
b. Under what circumstances will the operating income under each method be the same?
c. What situation will cause the absorption costing income to be higher than the variable costing income?
d. What situation will cause the absorption costing income to be lower than the variable costing income?
e. Why would a company use absorption costing to prepare its income statements?
f. Why would a company use variable costing to prepare its income statements?

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Definitions:

Cross Elasticity

A measure of how the quantity demanded of one good responds to a price change of another good.

Complementary Goods

Products and services that are used together. When the price of one falls, the demand for the other increases (and conversely).

Positive

Pertaining to statements or analyses that are based on facts and devoid of any value judgments or recommendations.

Supply Curves

Graphical representations that show the relationship between the price of a good and the total amount of the good that suppliers are willing to sell.