Absorption and Variable Costing

Topics: Variable cost, Inventory / Pages: 4 (787 words) / Published: Mar 25th, 2013
CHAPTER 8

ABSORPTION AND VARIABLE COSTING

Learning Objectives

1. Explain the accounting treatment of fixed manufacturing overhead under absorption and variable costing.

2. Prepare an income statement under absorption costing.

3. Prepare an income statement under variable costing.

4. Reconcile reported income under absorption and variable costing.

5. Explain the implications of absorption and variable costing for cost-volume-profit analysis.

6. Evaluate absorption and variable costing.

7. Explain the rationale behind throughput costing.

8. Prepare an income statement under throughput costing.

Chapter Overview

I. Product Cost and Fixed Manufacturing Overhead A. Absorption-costing income statements B. Variable-costing income statements

II. Reconciliation of Absorption- and Variable-Costing Income A. No change in inventory levels B. Increase in inventory levels C. Decrease in inventory levels

III. Overall Evaluation of Absorption and Variable Costing

IV. Throughput Costing

Key Lecture Concepts

1. PRODUCT COST AND FIXED MANUFACTURING OVERHEAD

0 Product, or manufacturing, costs are comprised of direct materials, direct labor, variable manufacturing overhead, and fixed manufacturing overhead. The basic difference between absorption and variable costing is the treatment of fixed manufacturing overhead.

* With absorption (full) costing, all costs related to the manufacture of a good are product costs. Therefore, fixed manufacturing overhead attaches to the units being made and is carried in inventory until the product is sold.

* Absorption costing results in the preparation of a traditional income statement.

* Absorption costing is considered GAAP and is acceptable for tax reporting.

* Under variable costing, product cost is comprised solely of variable manufacturing costs. Fixed manufacturing overhead is viewed as a cost of being ready to produce, not

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