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.
What is not included in variable costing?Variable costing includes all of the variable direct costs in COGS but excludes direct, fixed overhead costs.
Which of the following costs are not included in finished goods inventory quizlet?[D] Under absorption costing, VARIABLE AND FIXED SELLING AND ADMINISTRATIVE EXPENSES would not be included in finished goods inventory.
Which of the following costs would be included in finished goods inventory?The cost of finished goods includes all expense along the way and includes the three main components that go into the production of goods -- direct labor, direct materials and overhead.
Which one of the following costs would not become part of the finished goods inventory?Option (b): Since direct materials cost is incurred for producing the finished goods. Therefore, the finished goods inventory which is not sold includes the cost of direct material costs.
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