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Special Project 2 - item then you would have an $18000 over...

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Blake BestBlake BestBlake Best      2808 Riverplace dr #10622808 Riverplace dr #10622808 Riverplace dr #1062  ArlingtonArlingtonArlington, TXTXTX 760067600676006 Phone: 281-814-6907 E-Mail: [email protected]@[email protected] Web: http://www.rowemediabestproductions.com Date: 3/29/2008 Gary Price President of FDP Company FDP Company Dear Mr. Gary Price: The Controller is referencing the absorption costing method and the variable costing method.  If your company  were to use the Absorption method, then a higher production level will increase Net Income because of the  Fixed Overhead cost being distributed among more products.  For Instance, when applying the absorption costing method the Fixed Overhead is accounted for on a product- by-product basis. Fixed Overhead is one constant number so if you had a cost of $18000 and made only one 
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Unformatted text preview: item, then you would have an $18000 over head cost, not including how much it actually cost to make it. Now, if you were to make 18000 items, then you would only have $1 for your overhead cost per item. Now, the difference comes from which method you used to find your Net Income. If you used the absorption method then you would only report the overhead per unit you sold . If we were to expound on the previous example, and you had an OH cost of $18000 and you produced 18000 items, but only sold 15000 items, then only the $15000 will be taken away from the bottom line. The $3000 will be added to the Net Income. Therefore increasing the reported Net Income to your customers. Sincerely, Blake Best Accounting Consultant 2...
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  • Spring '08
  • BobbieMartindale
  • Net Income, Generally Accepted Accounting Principles, Gary Price President of FDP Company FDP Company

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