Variable Costing—A Tool for Management Show
Learning Objectives
Chapter Overview A. Overview of Variable and Absorption Costing. At least two methods can be used in manufacturing companies to value units of product for accounting purposes—absorption costing and variable costing. These methods differ only in how they treat fixed manufacturing overhead costs.
B. Comparison of Absorption and Variable Costing. When comparing absorption costing and variable costing income statements, a number of points should be noted:
C. Extended Comparison of Income Data. Exhibit 7-3 in the text presents a comparison of absorption costing and variable costing income statements over three years in which production is constant but sales vary. Exhibit 7-6 in the text also presents comparative income statements over three years but holds annual sales constant and varies annual production. From these Exhibits, several generalizations can be drawn. (All of these generalizations assume the LIFO inventory flow assumption is being used. The generalizations may not hold in some rare cases if a company uses an inventory flow assumption other than LIFO.)
D. The Matching Principle. Accountants and managers have been arguing for decades concerning the relative merits of absorption and variable costing. In practice, absorption costing is used far more than variable costing even for internal reports. The reasons for this are not entirely clear, although the perception that absorption costing is required for external reporting undoubtedly plays a key role. The argument for using absorption costing in external reports seems to be based on the matching principle.
E. Advantages of the Contribution Approach. There are a number of advantages to using variable costing (and the contribution approach) in internal reports and analysis.
F. Impact of JIT Inventory Methods. When companies use JIT methods for controlling their operations, the distortions of income that can occur under absorption costing largely (or completely) disappear.
Which of the following manufacturing costs are assigned to products under absorption costing?(T) Under absorption costing, direct materials, direct labor, and all manufacturing overhead costs are assigned to products. 2.
Does absorption costing assign manufacturing costs to products?Key Takeaways. Absorption costing includes all of the direct costs associated with manufacturing a product. Variable costing can exclude some direct fixed costs. Absorption costing entails allocating fixed overhead costs to all units produced for an accounting period.
When using absorption costing what is included in product costs?Absorption costing refers to a method of costing to account for all the costs of manufacturing. The management uses this method to absorb the costs incurred on a product. The costs include direct costs and indirect costs. Direct costs include materials, labour used in production.
Which of the following best describes costs assigned to the product under the absorption?Answer: c. DL, DM, variable manufacturing overhead, and fixed manufacturing overhead. Under the absorption costing method, the cost to produce includes the direct materials used, direct labor, and all the factory manufacturing overhead, that includes the variable and fixed.
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