6-1 Absorption costing is a costing system which treats all costs of production as product costs, regardless weather they are variable or fixed. The cost of a unit of product under absorption costing method consists of direct materials,direct laborand both variable and fixed overhead. Variable costing is a costing system under which those costs of production that vary with output are treated as product costs. This would usually include direct materials,direct laborand variable portion of manufacturing overhead. 6-2 Variable costing treats variable and fixed selling and administrative expense as period cost. 6-3 Fixed manufacturing overhead cost are shifted from one period to the next because these cost are included in the work in progress account. 6-4 Absorption costing advocates argue that:
1- absorption costing does a better job of MATCHING COSTS WITH REVENUES than variable costing 2-all manufacturing costs must be assigned to products to properly state the full cost of costing a product 3-managers, misled when they work with product cost information that fails to include the allocated share of fixed cost, make incorrect pricing decisions 6-5 Variable costing advocates argue that:
1- fixed manufacturing costs are not really the cost of any particular unit of product.If a unit is made or not, the total fixed manufacturing costs will be exactly the same. 6-6 Absorption costing will usually show higher net operating income than variable costing 6-7 if fixed manufacturing overhead cost is released from inventory, then inventory levels must have decreased and therefore production must have been less than sales. 6-8
6-10 net operating income can be increased by increasing the level of production without any increase in sales. 6-11A segment is an activity of an organization which a manger seeks cost, revenue, or profit data. 6-12 A cost will be assigned if the cost are traceable to that segment. 6-13 Traceable costs arise because of the existence of a...
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