Variable costing is the required inventory method for external reporting in most countries.

-This variance is also know as the denominator-level variance.-The formula is: Budgeted Fixed Overhead – Fixed Overhead allocated for actual output units producedInterpreting the Production—Volume Variance•Interpretation of this variance is difficult due to the nature of the costs involved and how they arebudgeted.•Fixed costs are by definition somewhat inflexible. While market conditions may cause production to flexup or down, the associated fixed costs remain the same.•Fixed costs may be set years in advance, and may be difficult to change quickly.•Contradiction: Despite this, examination of the fixed overhead budget formulae reveals that it isbudgeted similar to avariablecost.Production-Volume Variance and Sales-Volume Variance-You may recall from Chapter 7 that the static budget variance (the difference between the static budget and theactual results) was $93,100 Unfavorable for Webb Company, our sample company.-The sales-volume variance (the difference between the flexible budget and the static budget) was $64,000Unfavorable.-The sales-volume variance consists of two components:The operating-income volume variance and theproduction-volume variance.Variance Analysis and Activity—Based Costing•Activity-based costing systems focus on individual activities as the fundamental cost objects.•Variances are calculated for each activity.•Here is an example of the variance analysis for one activity at Lyco Brass worksOverhead Variances in Nonmanufacturing Settings•Nonmanufacturing companies can benefit from overhead variances just as manufacturing companiescan.•Variance analysis can be used to examine overhead costs and make decisions about pricing, managingcosts, and the mix of products.•Output measures will be different and can be passenger-miles flown, patient days provided, rooms-daysoccupied, ton-miles of freight hauled, etc.

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Copyright © 2015 Pearson Education, Inc. 

Cost Accounting, 15e

 (Horngren/Datar/Rajan) 

Chapter 9 

Inventory Costing and Capacity Analysis 

Objective 9.1 

1) Which of the following costs is inventoried when using variable costing? 

A) rent on factory building 

B) electricity consumed in manufacturing process 

C) sales commission paid on each sale 

D) advertising costs incurred for the product 

Answer: 

B 

Diff: 1 

Objective: 

1 

AACSB: 

Application of knowledge 

2) Which of the following costs is inventoried when using absorption costing? 

A) variable selling costs 

B) fixed administrative costs 

C) variable manufacturing costs 

D) fixed selling costs 

Answer: 

C 

Diff: 1 

Objective: 

1 

AACSB: 

Analytical thinking 

3) ________ is a method of inventory costing in which all variable manufacturing costs (direct and 

indirect) are included as inventoriable costs and all fixed manufacturing costs are excluded. 

A) Variable costing 

B) Mixed costing 

C) Absorption costing 

D) Standard costing 

Answer: 

A 

Diff: 1 

Objective: 

1 

AACSB: 

Analytical thinking 

4) ________ is a method of inventory costing in which all variable manufacturing costs and all fixed 

manufacturing costs are included as inventoriable costs. 

A) Variable costing 

B) Mixed costing 

C) Absorption costing 

D) Standard costing 

Answer: 

C 

Diff: 2 

Objective: 

1 

AACSB: 

Analytical thinking 

Is variable costing used for external reporting?

Which costing method is used for external reporting?

Is variable costing internal or external?

Why is variable costing used for internal reports?