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Chapter+5+Class+Notes_ - Chapter 5 Objectives 1. Explain...

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    Chapter 5 Objectives 1. Explain the difference between full (absorption) and variable costing. 2. Prepare income statements using variable costing and full costing. 3. Show the effect of production on full and variable costing income and inventory 4. Discuss how income can be manipulated with full costing 5. Discuss the benefits of variable costing for internal reporting purposes
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    Full (Absorption) Costing Full Costing: measures the value of inventories at full product cost including fixed and variable costs. It is also called absorption costing because with full costing fixed overhead is absorbed into units of product. Fixed manufacturing costs such as factory rent, supervisor salaries, depreciation of equipment etc. are allocated to units of product.
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    Full (Absorption) Costing Full Costing is required for external (financial) reporting and is useful for tracking the full cost of producing inventory (e.g. for insurance losses) But Decision making and “what-if” decisions become problematic with full costing because of the commingling of fixed and variable overhead.
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    Variable Costing Variable Costing includes in the cost of inventory only : Direct material Direct labor Variable Production overhead Fixed overhead is treated as an expense of the period so it is not absorbed into the product
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    Variable Costing-comments Variable Costing lends itself well to decision making, performance evaluation, and “what-if” analyses. To use it we have to be able to analyze costs into fixed and variable. However, it is not allowed by GAAP for financial reporting.
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    Variable Costing Income Statement The variable costing income statement uses a contribution margin approach. All costs, manufacturing, selling and administrative, are classified as either fixed or variable.
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    Variable Costing Income Statement Example Sales $100,000 Less Variable Costs: (35,000) Contribution Margin 65,000 Less Fixed Costs (25,000) Net Income 40,000
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    Full (Absorption) Costing Income Statement The full costing income statement does  not distinguish between fixed and  variable costs 
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This note was uploaded on 05/01/2008 for the course ACCT 1301 taught by Professor Milbrath during the Summer '07 term at University of Houston.

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Chapter+5+Class+Notes_ - Chapter 5 Objectives 1. Explain...

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