ch7 - Managerial Accounting Chapter 7 Variable &...

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Managerial Accounting Chapter 7 Variable & Absorption Costing
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Chapter 7 Highlights How do we computer a product’s cost using variable costing? Using absorption costing? How are fixed costs are deferred in inventory under absorption costing? How do we prepare income statements under each method? Can we reconcile net Income differences between the two methods? What are the benefits and limitation of each method?
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VARIABLE VERSUS ABSORPTION COSTING VARIABLE COSTING Under variable costing, only those costs of production that vary with output are treated as product costs. These costs usually consist of direct materials, direct labour, and variable manufacturing overhead. Fixed manufacturing overhead is not treated as a product cost under variable costing. Rather, it is treated as a period cost and deducted in full each year from revenues.
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VARIABLE VERSUS ABSORPTION COSTING VARIABLE COSTING Variable costing may be used by companies internally for planning and for controlling operations. It is also acceptable for tax reporting in Canada. Note: for tax purposes either method may be used
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ABSORPTION COSTING Absorption costing treats all production costs as product costs. Unit product cost under the absorption costing method consists of direct materials, direct labor, and both variable and fixed manufacturing overhead. Under absorption n costing a portion of the fixed manufacturing overhead is allocated to each unit of product. Note: this method is the one normally accepted for external Financial statement use – GAAP preferred
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Absorption Costing Variable Direct materials Direct labour Product costs Product costs Variable mfg. overhead Fixed mfg. overhead Period costs Period costs Selling & admin. exp.
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ch7 - Managerial Accounting Chapter 7 Variable &...

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