Acc550-ch 9 - ACC550 CHAPTER 9 INVENTORY COSTING & CAPACITY...

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CHAPTER 9 Variable costing versus absorption costing Introduction: The difference between these two inventory costing methods lies in the types of costs we assign to inventory units under each method. Under absorption costing, we assign ALL manufacturing costs (fixed and variable) to inventory units …. .this means that fixed manufacturing costs and variable manufacturing costs are assigned to inventory units under absorption costing. Under variable costing, we assign ONLY variable manufacturing costs to inventory units……fixed manufacturing costs are NOT assigned to inventory units and are instead expensed as incurred. Thus, a product cost under absorption costing includes both fixed and variable manufacturing costs, whereas a product cost under variable costing includes only variable manufacturing costs. Under BOTH methods, non-manufacturing costs are expensed as incurred……in other words, we do NOT assign non- manufacturing costs to inventory units under either method. Absorption costing 1) All manufacturing costs, variable and fixed, are treated as inventoriable costs. 2) All non-manufacturing costs, variable and fixed, are treated as period costs and expensed as incurred. 3) Required under GAAP. 4) Utilizes the traditional (functional) income statement format. Revenue XX Less: COGS XX Gross profit XX Less: Operating expenses XX Operating income XX 5) The chapter on job costing used absorption costing. Variable costing 1) Variable manufacturing costs are treated as inventoriable costs. These are typically comprised of direct materials, direct labor and variable indirect manufacturing costs 2) Fixed manufacturing costs are treated as period costs and expensed as incurred. These are typically comprised of fixed indirect manufacturing costs. 3) All non-manufacturing costs, variable and fixed, are treated as period costs and expensed as incurred. 4) Does NOT comply with GAAP. 5) Utilizes the contribution margin (behavioral) income statement format. Revenue XX Less: variable expenses XX (including variable non-manufacturing costs) Contribution margin XX Less: fixed expenses XX (including fixed manufacturing costs) Operating income XX Accounting flow of manufacturing costs 1) Variable manufacturing costs a) Absorption costing: First to WIP then to Finished goods then to Cost of goods sold b) Variable costing : First to WIP then to Finished goods then to Cost of goods sold 2) Fixed manufacturing costs a) Absorption costing: First to WIP then to Finished goods then to Cost of goods sold b) Variable costing : Directly to Fixed manufacturing expenses on the income statement 3) If all units produced are sold, total expenses will be the same under both methods. 1
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This note was uploaded on 02/21/2009 for the course ACC 100 taught by Professor Smith during the Spring '09 term at University of Phoenix.

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Acc550-ch 9 - ACC550 CHAPTER 9 INVENTORY COSTING & CAPACITY...

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