1) Why is the term direct costing a misnomer?

2) Do companies in either service sector or the merchandising sector make choices about absorption costing versus variable costing?

Answer:

1. Variable costing does not include all direct costs as inventor able costs. Only variable direct manufacturing costs are included.

a. Any fixed direct manufacturing costs and any direct nonmanufacturing costs (either variable or fixed) are excluded from inventorial costs.

b. Variable costing includes as inventorial costs not only direct manufacturing costs but also some indirect costs (variable indirect manufacturing costs).

2. No. The difference between absorption costing and variable costs is due to accounting for fixed manufacturing costs. As service or merchandising companies have no fixed manufacturing costs, these companies do not make choices between absorption costing and variable costing.