We cover the different ways in which variable costing and absorption costing treat fixed manufacturing overhead. Under variable costing, direct materials, direct labor, and the variable portion of manufacturing overhead are treated as product costs. So, only those manufacturing costs that vary with output are treated as product costs under variable costing. Fixed manufacturing costs are expensed as period costs. Absorption costing treats all manufacturing costs as product costs, regardless of whether they are variable or fixed. In each month, fixed manufacturing overhead cost is divided by the number of units produced to determine the fixed manufacturing overhead cost per unit under absorption costing. Overview of Variable and Absorption Costing Knowledge Check 01 The difference between absorption costing net operating income and variable costing net operating income can be explained by the way these two methods account for . multiple choice 1 all overhead costs fixed overhead costs selling and administrative expenses variable overhead costs Knowledge Check 02 Absorption costing income statements ignore . multiple choice 2 direct materials and direct labor costs direct and indirect cost distinctions product and period cost distinctions variable and fixed cost distinctions Knowledge Check 03 When the number of units produced is greater than the number of units sold, variable costing net operating income will be .