Absorption (Full) Costing
-Accumulate all products with inventory (all manufacturing costs are charged to, or absorbed by the product)
-Income Statement (product vs. period format)
-Required for external reporting (GAAP and IFRS)
-Does not facilitate CVP Analysis and other management decisions
Variable Costing (Contribution Margin Income Statement)
-Accumulate only variable product costs with inventory
-Fixed OH is expensed in the period incurred (treat like period cost)
-Must still assign product costs to inventory; however, inventory valuation is limited to variable product costs
-Income Statement (variable/fixed format)
-Used for internal purposes only -> facilitates planning (CVP analysis), evaluation of segments, etc.
Fixed Overhead Treatment
What causes the difference in Operating Income?
Net Income will be equal under the two costing approaches
What happens if production is equal to sales volume?
Income will be higher under absorption costing because less fixed overhead is expensed under absorption costing.
What happens if production is greater than the sales volume?
Income will be higher under variable costing because more fixed overhead was incurred under absorption costing.
What happens if production is less than the sales volume?
No, therefore, the amount of selling and administrative costs expensed is always the amount incurred!
Are period costs ever assigned to inventory?
DM, DL, Variable OH & Fixed OH
What does the valuation of ending inventory include in each unit under absorption costing?
DM, DL, Variable OH
What does the valuation of ending inventory include in each unit under variable costing?
1. Variable costing is consistent with cost-volume-profit analysis and supports decision making.
2. Net income computed under variable costing is unaffected by changes in production levels.
-Management may be tempted to overproduce in a given period in order to increase net income under absorption costing.
What are potential advantages of variable costing?
Segmented Income Statements
Managers need more than a single, company-side income statement; they need statements that focus on the various segments of a company.
Any part or activity of an organization about which a manager seeks cost, revenue, or profit data.
ex) product lines, geographic regions, and sales territories
Segmented Income Statements can be prepared at different levels.
What can be done to facilitate evaluation and decision-making?
Sales and variable costs are generally traceable to a given segment but fixed costs may or may not.
Are sales, variable, and fixed costs traceable in segmented income statements?
Direct Fixed Costs
Exist because the segment exists (i.e., are traceable)
ex) salary of manager of C-Stat store to C-Stat store
Common Fixed Costs
Exist because of multiple departments; must be allocated, but the allocations are not useful for evaluation segments.
ex) salary of manager of C-Stat store to individual product lines
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