Chapter 6- Sharpen Video Flashcards
What are the types of costing commonly used to figure out the value of your business’s inventory and income?
Variable Costing and Absorption Costing.
What is the main difference between Variable Costing and Absorption Costing?
Absorption costing factors a portion of fixed manufacturing overhead cost to each unit of product along with the variable manufacturing cost like direct materials, labor, insurance, and rent.
Variable costing only accounts for indirect overhead in the costs of manufacture per unit of product.
Which costing method is required for GAAP and the IRIS (external reporting)?
Absorption Costing- accounts for every cost tied to manufacturing a particular product.
Why can absorption costing cause the profitability of a business to appear higher than it actually is?
A business’s normal fixed overhead cost are considered product cost and are therefore included in inventory. Fixed expenses are not deduced from its revenue until sales occur.
Variable Costing
Excludes all direct fixed cost of overhead and only looks at the material, labor, and indirect costs for products. Gives the business a better idea of how each product contributes. Better for internal decision-making. FMOH is treated as a period cost.
How are selling and administrative costs treated in each method?
Under both methods, selling and administrative costs are treated as period costs. They go directly to the income statement as an expense.
Segment
A part or activity of an organization, about which managers collect cost, revenue, or profit data.
Variable Costing
Also known as direct costing or margin costing, only variable costs are treated as product costs.
Absorption Costing
Also called the full cost method- all manufacturing costs, including fixed manufacturing overhead, are treated as product costs.
How do the income statements differ in structure between variable costing and absorption costing?
Variable costing categorizes costs according to how they behave, while absorption costing categorizes costs by function.
What happens when all the units produced were also sold during a particular period?
Absorption and variable costing would be the same (equivalent).
What happens if more units are produced than sold during a period?
Absorption costing income would be greater than variable costing income as fixed manufacturing costs are deferred in inventory.
What happens if fewer units are produced than sold during a period?
Absorption costing income would be less than variable costing income because fixed manufacturing costs are released from inventory.
Traceable Fixed Cost
A fixed cost that is incurred because a segment exists.
Common Fixed Cost
A fixed cost that supports the operations of more than one segment, but is not traceable in whole or in part to any one segment.
