Variable and absorption costing

Absorption vs. Variable Costing

Absorption costing is required for GAAP ,[object Object],[object Object]

Absorption costing: how it works ,[object Object],[object Object],[object Object],[object Object],[object Object]

Absorption costing: how it works, continued ,[object Object],[object Object],[object Object]

But what happens under variable costing ,[object Object]

Let’s use the Widget Works data to illustrate the difference between absorption and variable costing. Here’s the original information again.

What would a variable costing income statement look like here?

But absorption costing net income was... Hmmm…that’s a difference of $9,000! We’re better off (smaller loss), but where did the $9,000 come from?

Absorption and variable costing net income reconciliation ,[object Object],[object Object],[object Object],[object Object],[object Object]

This leads directly to the following conclusions. Ceteris paribus , ,[object Object],[object Object],[object Object]

Now suppose you find yourself in the following situation: ,[object Object],[object Object],[object Object],[object Object]

Answer? ,[object Object],[object Object],[object Object],[object Object],[object Object]

Ethical? ,[object Object],[object Object],[object Object],[object Object]

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