Every manufactured unit comes with costs. Generally, a unit's costs are categorized as either fixed or variable. Fixed costs are costs that do not vary with activity level. In contrast, variable costs are directly related to the unit but vary based on activity level. Accountants can analyze costs relating to each unit based on the contribution method. Segmented income statements, which are common in manufacturing, are also useful in determining a specific segment's net income and costs. Analyzing and understanding these different types of costs gives managers vital information when they are deciding whether to eliminate a segment or adjust costs.
At A Glance
Variable costing, a method where all fluctuating expenses from manufacturing are considered to be part of inventory expenses, is useful for various types of analysis and decision-making but does not take into account any fixed manufacturing overhead costs.
- Manufacturers use three types of costing methods: variable costing, absorption costing, and throughput costing.
- The contribution margin can assist companies in making decisions, determining their break-even point, and understanding the effect their costs have on their profits.
- Segmented income statements break down income and expenses as they relate to cost allocation.
Segmented income statements are common in manufacturing.
- By breaking down income and expenses to cost components, managers can make wiser decisions about processes and departments.