10014_032610_18 - It makes no difference how many units we...

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II. Example – Points to Remember 1. Unit costs differ between Absorption Costing and Variable Costing (because of FOH) 2. S&A expenses are always period expenses (deducted from revenues in the current period. Are not product costs for either method. 3. Reconciliation between 2 methods for Net Income: a. Absorption Costing Inventories increase. Some of the FOH of the current year will remain in FG Inventory (with those units not sold). We say, “FOH is deferred in inventory.” So, 100% of the FOH did NOT make it onto the income statement as a deduction from revenue in the form of COGS. b. Variable Costing Whether inventories increase or decrease (or stay the same), ALL of the FOH of the current period ends up on the income statement as a period expense. So, 100% of the FOH ALWAYS appears as an expense.
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Unformatted text preview: It makes no difference how many units we produce! III. Differences in Net Income Between Absorption & Variable is based on Production 1. Production Units = Sales Units Absp NI = VC NI 2. Production > Sales Absp NI > VC NI (End FG Inventory Increase) (FOH deferred) 3. Production < Sales Absp NI < VC NI (End FG Inventory Decrease) (FOH released from current period & from prior periods) ** Does production have an impact on NI when Variable Costing is used? NO. IV. JIT & Lean Production Very little inventory, so changes in inventory will be immaterial. Absorption & Variable Costing net income will show basically the same figure. Unit costs will differ but differences in net income will disappear....
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This note was uploaded on 08/25/2010 for the course ACCT 208 taught by Professor Kingery during the Spring '08 term at University of Delaware.

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