[nalratoss]

So let me get this straight on the concepts of absorption costing/variable costing and gross margin/contribution margin.

In absorption costing, the inventoriable costs are the manufacturing costs, regardless of whether they are variable or fixed.

And the CGS in the calculation of gross profit, CGS = variable + fixed manufacturing cost = product cost

In variable costing, the inventoriable costs are the variable manufacturing costs. That leaves period costs to fixed manufacturing, fixed S&A and variable S&A, right?

However, the contribution margin is calculated not by (sales – inventoriable costs in variable costing), because all variable costs are deducted—it’s sales – (variable manufacturing + variable non manufacturing (s&A)), right?

Holy smoke, now I know. This was the part that confused me to hell.

[nalratoss]

BTW beaware of decision costing it's the first item that confuses me and a lot of stuff is interrelated on that.

[nalratoss]

In addition, here is a more critical question.

If sales and production is not equal, how to determine cost of good manufactured number when calculating cosst of good sold in absorption costing, shall I use the number of sales or number of production?

And what about in variable costing, shall I use number of sales or number of production to calculate fixed overhead of manufacturing?

I'm confused to death by Gleim. Their simulation produces two different explanations in variable costing when calculating operating income. In one scenario they used number of items produced to calculate fixed cost, in another they used number of items sold to calculate fixed cost.

Please help, thanks.

[Anonymous]

@nalratoss – absorption costing uses production to determine the spread. Whatever is produced in the period is allocated costs (typically standard costing is used). Sales don't affect the absorption costing method. You keep all manufacturing costs with the products until they are sold.

[Author]

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