Session 06 - Session 6 Reporting Operating Results...

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Session 6
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Reporting Operating Results – Managerial vs Financial Accounting
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Reporting Operating Results – Absorption Costing vs. Variable Costing From financial accounting you’re already familiar with absorption costing (even if you aren’t aware of it). And, the job costing systems that we have been discussing were absorption costing systems Under Absorption costing , both variable and fixed manufacturing costs are accounted for as product costs, i.e., they are allocated to the product and included in (debited to) WIP. Thus, under absorption costing all manufacturing costs are capitalized as inventory costs and, subsequently, are recognized as expenses only when the goods are sold. But, another costing scheme – variable costing – can be and is often used for managerial decision making and reporting purposes. Under Variable costing , only the variable manufacturing costs are accounted for as product costs and capitalized as inventory costs. Fixed manufacturing costs (fixed overhead) are treated as period costs and are expensed each period as they are incurred.
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The fact that firms must use absorption costing for financial reporting can have unexpected (and often undesirable) consequences for the financial reports that they distribute to the public. To illustrate those consequences and to compare the effects of an absorption costing system with those of a variable costing system, we will examine the example on the following page.
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Example At the beginning of 2008, Carter Corp. prepared an annual budget in which variable production costs (including variable overhead) were expected to be $20 per unit and fixed manufacturing costs – all overhead – were predicted to be $4,000 for the year. Its planned production for the year was 800 units. At the beginning of
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Session 06 - Session 6 Reporting Operating Results...

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