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Unformatted text preview: 91 Chapter 7 Variable Costing: A Tool for Management Solutions to Questions 7-1 The basic difference between absorption and variable costing is due to the handling of 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 variable costing, fixed manufacturing overhead is treated as a period cost and is charged in full against the current periods income. 7-2 Selling and administrative expenses are treated as period costs under both variable costing and absorption costing. 7-3 Under absorption costing, fixed manufacturing 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 as part of their inventory cost. When the units carried over as inventory are finally sold, the fixed manufacturing overhead cost that has been carried over with the units is included as part of that periods cost of goods sold. 7-4 Absorption costing advocates believe that absorption costing does a better job of matching costs with revenues than variable costing. 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 revenues. 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 the capacity to 919 1919191919191919191919191919191919191919191919191919191919191919191919191919191919191 919191919191919191919191919191919191 91 91919191919191919191919191919191919191919191919 1919191919191 make products during a particular period and should be charged against that period as period costs according to the matching principle....
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This note was uploaded on 04/19/2011 for the course ACC 2302 taught by Professor Hooreman during the Spring '10 term at Al Akhawayn University.
- Spring '10