Principles of Managerial Accounting · free preview
Variable Costing versus Absorption Costing
Variable costing treats fixed manufacturing overhead as a period cost and values inventory only with variable production costs, while absorption costing capitalizes fixed overhead into inventory, so the two methods report different incomes whenever inventory changes.
1. Two treatments of fixed overhead
Two treatments of fixed overhead
2. Unit costs compared
Unit costs compared
3. Income divergence
Income divergence
4. Why managers keep variable costing
Why managers keep variable costing
5. Absorption unit cost
Unit costs are 10 dollars of materials, 5 of labor, 2 of variable overhead, and a 5 dollar fixed overhead rate. Compute the absorption unit product cost.
6. Variable unit cost
Using the same data, compute the variable-costing unit product cost.
7. Production exceeds sales
In a period when production exceeds sales, which method reports higher operating income?
8. Reconciliation rule
Fixed overhead rate is 5 dollars, and inventory rises by 2,000 units during the period. Compute the income difference between absorption and variable costing.
9. GAAP-required method
External financial reporting requires ____ costing, which capitalizes fixed overhead into inventory. One word.
10. Internal preference
Internal decision reports prefer ____ costing because income moves with sales rather than production. One word.
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