12e_GNB_CH07_Solutions_Manual - Chapter 7 Variable Costing:...

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Sheet1 Page 1 Chapter 7 Variable Costing: A Tool for Management Solutions to Questions 7-1 Absorption and variable costing differ in how they handle fixed manufacturing overhead. Under absorption costing, fixed manufacturing overhead is treated as a product cost and hence is an asset until products are sold. Under varia- ble costing, fixed manufacturing overhead is treated as a period cost and is expensed on the current period& s income statement. 7-2 Selling and administrative expenses are treated as period costs under both variable cost- ing and absorption costing. 7-3 Under absorption costing, fixed manu- facturing overhead costs are included in product costs, along with direct materials, direct labor, and variable manufacturing overhead. If some of the units are not sold by the end of the period, then they are carried into the next period as inventory. The fixed manufacturing overhead cost attached to the units in ending inventory follow the units into the next period. When the units are finally sold, the fixed manufacturing overhead cost that has been carried over with the units is included as part of that period“ s cost of goods sold. 7-4 Absorption costing advocates believe that absorption costing does a better job of matching costs with revenues than variable cost- ing. They argue that all manufacturing costs must be assigned to products to properly match the costs of producing units of product with the revenues from the units when they are sold. They believe that no distinction should be made between variable and fixed manufacturing costs for the purposes of matching costs and reve- nues. 7-5 Advocates of variable costing argue that fixed manufacturing costs are not really the cost of any particular unit of product. If a unit is made or not, the total fixed manufacturing costs will be exactly the same. Therefore, how can one say that these costs are part of the costs of the products? These costs are incurred to have
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Sheet1 Page 2 the capacity to make products during a particu- lar period and should be charged against that period as period costs according to the matching principle. 7-6 If production and sales are equal, net operating income should be the same under ab- sorption and variable costing. When production equals sales, inventories do not increase or de- crease and therefore under absorption costing fixed manufacturing overhead cost cannot be deferred in inventory or released from inventory. 7-7 If production exceeds sales, absorption costing will usually show higher net operating income than variable costing. When production exceeds sales, inventories increase and under absorption costing part of the fixed manufactur- ing overhead cost of the current period is de- ferred in inventory to the next period. In con- trast, all of the fixed manufacturing overhead cost of the current period is immediately ex- pensed under variable costing. 7-8 If fixed manufacturing overhead cost is
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This note was uploaded on 12/30/2010 for the course ACC MG taught by Professor Dr.leiter during the Spring '10 term at Andrew Jackson.

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12e_GNB_CH07_Solutions_Manual - Chapter 7 Variable Costing:...

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