Session 06

Session 06 - Session 6 Reporting Results Managerial vs...

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Reporting Results – Managerial vs Financial Accounting Session 6
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Reporting Results – Absorption Costing vs. Variable Costing From financial accounting you’re already familiar with absorption costing (even if you aren’t aware of it). And, the job costing systems that we have been discussing were absorption costing systems Under Absorption costing , both variable and fixed manufacturing costs are accounted for as product costs, i.e., they are allocated to the product and included in (debited to) WIP. Thus, under absorption costing all manufacturing costs are capitalized as inventory costs and, subsequently, are recognized as expenses only when the goods are sold. But, another costing scheme – variable costing – can and is often used for managerial decision making and reporting purposes. Under Variable costing , only the variable manufacturing costs are accounted for as product costs and capitalized as inventory costs. Fixed manufacturing costs (fixed overhead) are treated as period costs and are expensed each period as they are incurred.
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The fact that firms must use absorption costing for financial reporting can have unexpected (and often undesirable) consequences for the financial reports that they distribute to the public. To illustrate those consequences and to compare the effects of an absorption costing system with those of a variable costing system, we will examine the example on the following page.
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Example At the beginning of 2006, Carter Corp. prepared an annual budget in which variable production costs (including variable overhead) were expected to be $20 per unit and fixed manufacturing costs – all overhead – were predicted to be $4,000 for the year. Its budgeted production for the year was 800 units. At the beginning of 2006 , it had 200 units in finished goods inventory. (For 2005, variable and fixed manufacturing costs allocated to units produced were $20 per unit and $5 per unit, respectively.) The firm's actual results for 2006 were as follows: Production - 600 units; Sales - 700 units at $30 each. Actual total fixed costs were equal to budgeted total fixed costs, and actual
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This note was uploaded on 04/19/2008 for the course ACCT 102 taught by Professor Defoe during the Spring '08 term at UPenn.

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Session 06 - Session 6 Reporting Results Managerial vs...

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