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?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?
What will be an ideal response?
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. 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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