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CN09HO - Inventory Costing and Capacity Analysis Chapter 9...

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2005 UofW Business School Accounting 311 L.DuCharme 1 Inventory Costing and Capacity Analysis Chapter 9
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2005 UofW Business School Accounting 311 L.DuCharme 2 Learning Objective 1 Identify what distinguishes variable costing from absorption costing and throughput costing.
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2005 UofW Business School Accounting 311 L.DuCharme 3 Absorption Costing All manufacturing cost are considered inventoriable: All variable mfg. costs (both direct & indirect) All fixed mfg. costs (both direct & indirect) Separates costs by business function. Other costing terms: (1) Super-full absorption costing: includes some mfg. related admin costs—used for tax. (2) Full-product costing: costs from all areas of value chain are attached to product costs—for L-T pricing.
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2005 UofW Business School Accounting 311 L.DuCharme 4 Variable Costing All variable manufacturing costs are considered inventoriable. Separates costs by cost behavior. Some managers call this direct costing which is a poor choice of name. Why?
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2005 UofW Business School Accounting 311 L.DuCharme 5 Throughput Costing Also called super-variable costing. Only variable direct materials are inventoriable. Assumes that only DM are variable in the short run. Reduces incentives to build up inventories. Relatively new and not widely used.
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2005 UofW Business School Accounting 311 L.DuCharme 6 STOP! The big picture Managers make a number of accounting choices that affect income, for example: Costing Systems Fixed Mfg. Costs Flow of Costs Actual AC Job FIFO Normal VC Process LIFO Standard Tput Avg. Other Specific I.D. Standard Retail
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2005 UofW Business School Accounting 311 L.DuCharme 7 Inventory-Costing Methods The difference between variable costing and absorption costing is based on the treatment of fixed manufacturing costs. AC includes fixed mfg. costs in cost of inventory, while VC does not. VC expenses all fixed costs as period costs.
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2005 UofW Business School Accounting 311 L.DuCharme 8 Variable Costing Direct Materials Variable Factory Labor Variable Overhead Work in Process Inventory
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2005 UofW Business School Accounting 311 L.DuCharme 9 Variable Costing Work in Process Inventory Finished Goods Inventory Cost of Goods Sold Income Summary Fixed Factory Labor
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