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:

Average Variable Cost

The per-unit cost that varies, calculated through the division of total variable costs by the quantity of products made.

Economic Profits

The financial gain made in a transaction after accounting for both explicit and implicit costs.

Average Total Cost

The total cost of production divided by the quantity of output produced, representing the average cost per unit of output.

MC = MR

Stands for the economic principle where Marginal Cost (MC) equals Marginal Revenue (MR), a condition for profit maximization in firms, indicating the optimal level of production.