Chapter 8 - Chapter7 Variablecosting 1...

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1 Chapter 7 Variable costing
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2 Overview of Absorption and Variable  Costing Consider the following: The only cost of driving my car on the 36 kilometer round trip to and  from SFU  today  is about $5 for  gasoline. Is this correct?
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3 Overview of Absorption and Variable  Costing How about this counter-argument: No!  You have to consider these costs  too! Cost Per month Per day Maintenance 100.00 $ 3.33 $ Insurance 108.33 3.61 Is  this  correct?
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4 Overview of Absorption and Variable  Costing Is this a valid rebuttal? You’re wrong. I’ll have the  maintenance costs and the insurance expense even if I take the bus.
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5 Overview of Absorption and Variable  Costing So who’s right?  How should we treat maintenance and the  insurance? The answer is — it depends. It depends on what you are trying to  accomplish.
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6 Overview of Absorption and Variable  Costing Absorption Costing Direct materials Direct labour Product costs Variable mfg. overhead Fixed mfg. overhead Period costs Selling & admin. exp.
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7 Absorption and Variable Costing Under absorption costing, selling and  administrative expenses are always treated  as period costs and deducted from revenue. Under variable costing, selling and  administrative expenses are split into a  variable and fixed component; the fixed  component is treated as a period cost; the  variable component is part of the calculation  to determine the contribution margin.
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8 Overview of Absorption and Variable  Costing Absorption Costing Variable Costing Direct materials Direct labour Product costs Product costs Variable mfg. overhead Period costs Period costs Fixed selling & admin. exp. Variable selling & admin. exp. Fixed mfg. overhead. Fixed mfg. overhead. Variable selling & admin. exp.
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9 Absorption costing  absorbs  all costs of  production as part of the cost of goods  manufactured. Overview of Absorption and Variable  Costing Thus,  all  costs of production are treated as  product costs.
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10 Variable costing includes  only the costs that  vary  with production in the cost of goods  manufactured. Overview of Absorption and Variable  Costing Fixed costs are expensed as period costs.
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11 Both methods will reach the same interim  step of including variable costs in the  determination of the cost of a unit of  production. Overview of Absorption and Variable  Costing Absorption costing will take the extra step of  allocating fixed overhead to the unit and will  always  produce a  higher   unit cost  than  variable costing.
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12 Overhead costs that are assigned to units of  production cannot also be expensed in the  period. Consequently, they become part of  the value of inventory.
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Chapter 8 - Chapter7 Variablecosting 1...

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