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Costing confusion..

Cost Accountant (Student) (92 Points)

20 December 2013

In which of the following, fixed overheads are not included in the cost of inventory

a) Absorption costing

b) Direct Costing

c) Variable Costing

d) Marginal costing

Correct answer given is d). But my question is, aren't options b), c) and d) synonyms i.e. they mean same.

Direct, Variable and Marginal costing absorbs only the variable costs (or overheads) and leave Fixed costs (or overheads) while Absorption costing involves both fixed and variable costs. So, how can d) be correct??

Please help with this question....my exams are very near.

Thanks.

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5 Replies

Subhash (None) (122 Points)
Replied 20 December 2013

Hello,

Direct costing deals only with Direct expenses like Labour, Material, Direct expenditure etc.,

Most of the time Direct costs are variable and Indirect costs are fixed.
Hence, Fixed Overhead do not form part of Direct Costing.

Variable costing again deals only with variable costs i.e., Direct Material, Labour, expenditure costs.

Hence the same as above can be applied here. Fixed Overhead is Fixed and Direct and Variable Costing deal only with Variable costs.

Also, Variable and Direct costing are applied only for normal production. Hence, they vary with the level of production and hence are variable and they ignore the fact that Indirect or Fixed costs also contribute to the production.

But, Marginal costing deals with cost incurred in producing an additional unit and hence should actually consider both variable and fixed costs for that additional unit but this theory only assumes that Fixed costs do not contribute to producing an additional unit as they do not vary with the level of production.

Direct and Variable costing ignore Fixed costs.

Marginal costing only assumes it's not applicable. So, d) option is the right.

All the best with your exams.

Regards,
Subhash.

1 Like

Cost Accountant (Student) (92 Points)
Replied 20 December 2013

Thanks Subhash for your reply.

But see, you yourself said that "Fixed Overhead do not form part of Direct Costing and Variable Costing" because they deals only with "Variable Costs".
So that means that both b) and c) are correct as both are not including any Fixed Overheads.
Does this also mean that Direct Costing and Variable Costing are same thing??

Thanks Again.

NOUFAL (ACCOUNTANT) (762 Points)
Replied 20 December 2013

Actually i confused with this question and answer.........

Subhash (None) (122 Points)
Replied 23 December 2013

Yes, Direct Costing and Variable costing are the same. But they differ from Marginal Costing in two things: 1. Direct, Variable deal with normal production but Marginal Costing deals with additional production (over and above normal production) 2. Direct and Variable IGNORE fixed costs but Marginal only assumes it's not applicable for additional unit production.