Notes_Chapter_07 - CHAPTER 7: Absorption vs. Variable...

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CHAPTER 7: Absorption vs. Variable Costing I. Two Methods for Income Determination: Variable Costing vs. Absorption Costing A. Absorption (Full) Costing Accumulate all product costs w/ inventory WIP --> FG ---------> CGS Assign the following costs to inventory: Note : all manufacturing costs are charged to, or absorbed by, the product Income Statement (Product vs. Period format) Sales Less: COGS = Gross Margin Less: Operating Expenses Net Income Required for external reporting (i.e., GAAP) 1
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Does not facilitate CVP Analysis and other management decisions. B. Variable Costing o Accumulate only variable product costs with inventory WIP ---> FG ---> CGS Assign the following costs to inventory: Fixed OH is Note: Inventory must still be assigned product costs; however, inventory valuation is limited to variable product costs o Income Statement (variable/fixed format) Sales Less: Variable Costs = Contribution Margin Less: Fixed Costs 2
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= Income o Used for internal purposes only --> facilitates planning (CVP analysis), evaluation of segments, etc. Example 1:
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This note was uploaded on 06/01/2011 for the course ACCOUNTING 230 taught by Professor Allen during the Spring '11 term at Texas A&M.

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Notes_Chapter_07 - CHAPTER 7: Absorption vs. Variable...

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