ACC221ch07sp08

ACC221ch07sp08 - ACC221 Chapter 7 Variable Costing A Tool...

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1 ACC221 Chapter 7 Variable Costing: A Tool for Management 2 Objectives Covered 1. Explain how variable costing differs from absorption costing and compute unit product costs under each method. 2. Prepare income statement using both variable and absorption costing. 3. Reconcile variable costing and absorption costing net operating incomes and explain why the two amounts differ. 4. Understand the advantages and disadvantages of both variable and absorption costing.
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3 Objective 1 Explain how variable costing differs from absorption costing and compute unit product costs under each method. 4 Absorption Costing Allocates a portion of fixed manufacturing overhead to each unit produced during a period, along with variable manufacturing costs. Mingles variable and fixed costs together, units of product costed are not well suited for inclusion in contribution margin income statements. Treats all costs of production as product costs. The cost of a unit of product under the absorption costing method consists of direct materials, direct labor and variable and fixed overhead. Referred to as full cost method.
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5 Variable Costing Focuses on cost behavior. Harmonized fully with both the contribution approach and the CVP concepts. Only those costs of production that vary with output are treated as product costs (direct materials, direct labor and variable overhead). Fixed manufacturing overhead is treated as a period cost, not a product cost. It is expensed in the period incurred. Cost of product in inventory or in cost of goods sold under the variable costing method contains no element of fixed overhead cost. Referred to as direct costing or marginal costing. 6 Difference Between Absorption Costing and Variable Costing Treatment of fixed overhead cost. Absorption costing: treats fixed overhead cost as a product cost. Variable costing: treats fixed overhead as a period cost.
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7 Absorption vs. Variable Costing Direct Materials Direct Labor Variable Manufacturing Overhead Fixed Manufacturing Overhead Variable Selling and Administrative Expenses Fixed Selling and Administrative Expenses Variable Costing Absorption Costing Product Costs Period Costs Product Costs Period Costs 8 Unit Cost Computation Example Assume the following: Number of units produced 6,000 Variable Cost per unit: Direct materials $2 Direct labor 4 Variable manufacturing overhead 1 Variable selling and admin 3 Fixed Costs Manufacturing overhead $30,000 Selling and Admin. 10,000
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This note was uploaded on 06/09/2008 for the course ACC 221 taught by Professor Tribunella during the Spring '08 term at Rochester.

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ACC221ch07sp08 - ACC221 Chapter 7 Variable Costing A Tool...

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