Chapter 8 Flashcards
What are treated as Period Expenses in absorption costing?
Selling and Administrative Expenses and they are deducted from revenue
When production is greater than sales?
Inventory increases and absorption is greater than variable costs
When Production is less than sales?
Inventory Decreases, and absorption is less than variable costs
When production is equal to sales?
No change in inventory, and Absorption is equal to variable
Net operating income and variable costing?
Net operating income is not affected by changes in production using variable costing.
Net operating income and absorption costing?
Net operating income is affected by changes in production using absorption costing even though the number of units sold is the same each year
What is variable costing income affected by?
It is affected by changes in unit sales
What is variable costing income NOT affected by?
not affected by the number of units produced
General rule of Variable costing income?
when sales go up, net operating income goes up, and vice versa.
What is absorption costing income influenced by?
influenced by changes in unit sales and units of production.
How can net operating income increase?
can be increased simply by producing more units even if those units are not sold
Issues with absorption costing?
Shifting fixed manufacturing overhead costs between periods can lead to faulty decisions
Why is variable costing easier?
because net operating income is only affected by changes in unit sales.
Does Absorption costing support CVP?
NO because it treats fixed manufacturing overhead as a variable cost
What can treating fixed manufacturing overhead as a variable cost do?
Produce positive net operating income even when the number of units sold is less than the break-even point.
What can be used when fileing tax returns?
Either variable or absorption costing can be used
What do top execs use?
They use absorption because it looks bigger on an external financial statement
Fixed manufacturing with Absorption Costing?
must be assigned to products to properly match revenues and costs.
Fixed manufacturing with Variable Costing?
are capacity costs and will be incurred even if nothing is produced
What happens in JIT inventory system?
Production = Sales
When Production is greater than sales?
Absorption is greater than Variable
When Production is equal to sales?
No changes
When Production is less than sales?
Absorbtion is less than Variable
