Accounting202_Exam 2 Study Guide

Accounting202_Exam 2 Study Guide - Chapter 6 Absorption...

Info iconThis preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon
Chapter 6 Absorption Costing – Treats all Manu costs as product costs, regardless of whether they are variable or fixed o All fixed Manu O/H and variable Manu O/H together as product Product Costs DM + DL + Fixed/Variable Manu O/H Period Costs Fixed/Variable Selling and Admin Expenses o Unit Product Cost = Total Variable Manu Cost (DM + DL + Variable Manu O/H) + Fixed Manu O/H (Fixed Manu O/H / # of units produced) o Advantages Method is required by GAAP and tax authorities Method reflects the full costs of manufacturing a product Variable Costing – Only those Manu costs that vary with output are treated as product costs o Fixed Manu O/H is a period cost, not product Product Costs DM + DL + Variable Manu O/H Period Costs Fixed Manu O/H + Fixed/Variable Selling/Admin Expenses o Unit Product Cost = DM + DL + Variable Manu O/H o Advantages Method is compatible with CVP and TOC analysis, Method does not cause fluctuations in profit due to changing production and inventory levels, unlike the absorption method, Method show only variable product costs so it avoids the problem under absorption method where managers mistakenly think fixed manufacturing costs are variable product costs, Variable costing allows total fixed manufacturing overhead costs to be visible on the income statement, rather than being “buried” in the cost of goods sold and inventory figures, Variable costing avoids some of the problems with overhead costs allocations, and Variable costs are more easily used with standard costing and flexible budgeting. Effects o Production = Sales No change in Invs Absorption NOI = Variable NOI o Production > Sales Increase in Invs Absorption NOI > Variable NOI Since Fixed Manu O/H is deferred in Inv as Inv increases
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
o Production < Sales Decrease in Invs Absorption NOI < Variable NOI ( Called Fixed Manu O/H Cost released from Inv) Since Fixed Manu O/H is released from Inv as Inv decreases o Absorption Inventories increase some fixed Manu costs are reported on B/S as ending inventories rather than on I/S as COGS NOI is affected by changes in production (inventory) o Variable Makes CVP analysis easier NOI is not affected by changes in production (inventory) Chapter 7 Activity-Based Costing (ABC) – A costing method that is designed to provide managers with cost information for strategic and other decisions that potentially affect capacity and therefore “fixed” as well as variable costs o Overhead – refers to non-Manu costs as well as to indirect Manu costs o Organization-Sustaining Costs – ABC does not arbitrarily assign these types of costs Treated as period expenses rather than period costs Activity – Any event that causes the consumption of overhead resources Activity Cost Pool – A “bucket” in which costs are accumulated that relate to a single activity measure in the ABC system Activity Measure
Background image of page 2
Image of page 3
This is the end of the preview. Sign up to access the rest of the document.

Page1 / 9

Accounting202_Exam 2 Study Guide - Chapter 6 Absorption...

This preview shows document pages 1 - 3. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online