Chapter 8: Alternative Inventory Costing Methods: A Decision-Making Perspective Flashcards
What is the key difference between absorption costing and variable costing?
Absorption costing includes both variable and fixed manufacturing overhead as part of product costs,
while variable costing treats only variable manufacturing costs as product costs and fixed manufacturing overhead as period costs.
How does the choice between absorption costing and variable costing affect the income statement?
Under absorption costing, fixed manufacturing overhead is allocated to units produced and can defer some expenses to future periods as part of inventory costs.
Under variable costing, fixed overhead is expensed in the period incurred, leading to different net income figures, especially when production and sales levels differ.
How do changes in production levels affect net income under absorption and variable costing?
If production exceeds sales, absorption costing results in higher net income due to deferred fixed manufacturing overhead in ending inventory.
If sales exceed production, variable costing may show higher net income because there are no deferred overhead costs.
Why might variable costing be more useful for management decision-making than absorption costing?
Variable costing provides clearer insight into the actual costs to produce and sell one more unit (marginal costing) and doesn’t allocate fixed overhead costs to products, which can make it easier to make decisions about pricing, product mix, and cost control.
What is the normal-absorption-costing method, and how does it impact reported net income?
Normal-absorption costing is a way to allocate fixed overhead based on a standard, predetermined rate.
It can stabilize unit costs but may lead to differences in reported net income due to variations in actual production levels versus standard levels.
What is throughput costing, and how is it different from other costing methods?
Throughput costing, also known as super-variable costing, treats all costs except direct materials as period costs, aligning closely with the theory of constraints by focusing on the contribution of direct materials to throughput (sales less direct material costs).
What is the difference between absorption costing and variable costing?
Absorption costing includes all manufacturing costs (direct materials, direct labor, and both variable and fixed manufacturing overhead) in product costs.
Variable costing includes only variable manufacturing costs as product costs, treating fixed manufacturing overhead as period costs.
How do production and sales levels affect net income in absorption versus variable costing?
In absorption costing, net income can be affected by the number of units produced due to fixed overhead costs being allocated to inventory.
Under variable costing, net income reflects only the costs of units sold because fixed overhead is treated as a period cost.
How is net income calculated under absorption and variable costing when production equals sales?
When units produced equal units sold, net income will be the same under both costing approaches because there’s no change in inventory levels to affect the allocation of fixed overhead.
How does net income fluctuate under absorption costing when production exceeds sales?
Under absorption costing, net income increases when production exceeds sales because some fixed manufacturing overhead is allocated to the ending inventory and not expensed in the current period.
Which costs are relevant for decision-making in a variable costing scenario?
Relevant costs for decision-making under variable costing include direct materials, direct labor, variable manufacturing overhead, and any variable selling and administrative expenses.
Fixed costs are not considered in the incremental analysis unless they change due to the decision being made.
What is incremental analysis and how is it used in managerial accounting?
Incremental analysis is the process of identifying financial data that change under alternative courses of action.
It’s used to make decisions such as special orders, make-or-buy, and product line decisions by comparing relevant costs and revenues.
What is the Theory of Constraints and how does it apply to managerial accounting?
The Theory of Constraints is an approach to identify and manage constraints within a process to achieve company goals.
It involves continuously evaluating and managing the limiting factors in production or service processes.
What is absorption costing and how is it applied in financial reporting?
Absorption costing, also known as full costing, is an accounting method where all manufacturing costs, including both variable and fixed manufacturing overheads, are allocated to the product.
It’s required for external financial reporting under Generally Accepted Accounting Principles (GAAP).
What is variable costing and its relationship with decision-making?
Variable costing is a management accounting approach where only variable costs are assigned to inventory.
Fixed manufacturing overheads are treated as period costs.
It’s helpful for internal decision-making as it highlights the difference between variable and fixed costs, providing a more realistic assessment of company performance.
