Class 7 - Inventory Costing Choices Overview Absorption...

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Inventory Costing Choices: Overview Absorption Costing – product costs are capitalized; period costs are expensed Variable Costing – variable product and period costs are capitalized; fixed product and period costs are expensed Throughput Costing – only Direct Materials are capitalized; all other costs are expensed
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Costing Comparison Variable costing is a method of inventory costing in which only variable manufacturing costs are included as inventoriable costs Absorption costing is a method of inventory costing in which all variable manufacturing costs and all fixed manufacturing costs are included as inventoriable costs
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Differences in Income Operating Income will differ between Absorption and Variable Costing The amount of the difference represents the amount of Fixed Product Costs capitalized as Inventory under Absorption costing, and expensed as a period costs under Variable Costing
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Example XYZ Corp. is starting operations in 2008. They produce 300 units and sell 250 in the first year for $80 each. Variable manufacturing costs are $35 per unit Fixed manufacturing costs are $9,000 per year In 2009 XYZ produces 500 units and sells 550 What does income look like for 2008 and 2009 under full absorption and variable costing?
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