MPotter_Absorption Costing_072511

MPotter_Absorption Costing_072511 - Absorption Costing and...

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Absorption Costing and Management Page 1 Absorption Costing and Management Melissa Potter Rasmussen College ACG4010/Cost Accounting Principles and Practices July 25, 2011 Christopher R. Zapalski, CPA, Professor Absorption costing may provide an incentive for management to build up inventory that uses up its current assets of cash and raw materials, leaving the company unable to use the assets for other means that may benefit the company. If not controlled, absorption costing could in effect leave the company with a large stockpile of inventory waiting for sales to take place to reduce the inventory. Absorption costing allows businesses to directly realize all costs involved in manufacturing a product and is the resulting information becomes beneficial in making variable types of decisions by both internal and external users. One downfall of absorption costing is the possibility that
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Absorption Costing and Management Page 2 management will overstock inventory so that the reports show reduced costs, dividing the fixed costs over a larger number of products produced. According to Horngren, “Absorption costing is a method of inventory costing in which all variable manufacturing costs and all fixed manufacturing costs are included as inventorially costs” (Horngren, Datar, & Rajan, 2000/2012, p. 846). These costs include both the fixed and variable costs that a business realizes in its manufacturing (Horngren, Datar, & Rajan, 2000/2012, p. 303). When configuring the amount of the cost of goods using absorption costing, the cost for producing each product will decline with increased production. This happens because the fixed costs are divided by a larger number of
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This note was uploaded on 08/15/2011 for the course ACCT 400 taught by Professor Reif during the Spring '11 term at Rasmussen College.

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MPotter_Absorption Costing_072511 - Absorption Costing and...

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