chapter 8: alternative inventory costing methods: a decision making perspective Flashcards
full or absorption costing
our traditional way of designating direct material, direct labor, and variable and fixed overhead
all manufacturing costs are charged to, or absorbed by the product
selling and administrative expenses are period costs here
what is the approach used for external reporting under generally accepted principles
full or absorption costing
variable costing
only direct material, direct labor, and variable manufacturing overhead are considered product costs
fixed period costs are recognized as period costs when incurred
selling and administrative expenses are period costs here
one primary difference between variable costing and absorption costing
what does this do to NOI?
under variable costing, fixed MOH is charged as an expense in the current period because it is a period cost
absorption costing will show a higher net income than variable costing whenever there are more units produced than sold
when units produced are less than units sold, absorption or variable costing will have a higher net income? why?
variable costing
the unit fixed MOH cost is incurred once the product is sold under absorption costing
this means that it will incur the unit fixed MOH costs of past periods and of the current period
in variable costing, only the fixed cost of the period is incurred
when units produced are the same as units sold, absorption or variable costing will have a higher net income?
they will have the same net income
when units produced are more than units sold, absorption or variable costing will have a higher net income? why?
absorption costing
the cost of ending inventory is higher under absorption costing than under variable costing
the unit fixed MOH cost is incurred once the product is sold under absorption costing
so until it is sold, it remains as inventory (asset)
in variable costing, all of the fixed cost of the period is incurred
GAAP requires to use which method for the costing of inventory?
absorption costing
potential advantages of variable costing?
- the use of variable costing is consistent with the cost-volume profit and incremental analysis
- net income calculated under variable costing is not affected by changes in production levels. it is much easier to understand the impact of fixed and variable costs on the calculation of net income when using variable costing
- provides a more realistic assessment of a company’s failure or success during a period
- easier to identify fixed and variable cost components and understand their effect on the business. Allocating fixed costs to inventory makes it difficult to evaluate the impact of fixed costs on company’s results
normal costing
uses actual direct manufacturing costs and actual production units with a predetermined overhead rate
throughput costing (super variable costing)
treats all costs as period expenses except for direct materials
direct labor and MOH treated as period costs
based o. lean manufacturing principles
the two criterions needed to qualify for throughput costing
suitable for companies engaged in a manufacturing process in which conversion costs such as direct labor and MOH are fixed costs
management must favor cost accounting information that is helpful for short term, incremental analysis, such as special orders at a reduced price
how is inventory value using throughput costing?
only with direct material costs
the major difference between throughput costing and variable costing
under throughput costing, the direct labor and variable MOH are charged as expenses in the current period
variable costing will higher net income with more units produced than units sold
with fewer units `produced than units sold, who will have a higher net income? throughput costing or variable costing?
throughput costing
what does throughput costing encourage managers to do?
encourages managers to reduce operating costs such as direct labor and variable MOH which are treated as period costs, not product costs.
what are arguments to use variable costing instead of absorption costing?
appeal to the cost avoidance criterion as a necessary condition for asset recognition
The incurrence of fixed manufacturing costs this period will not allow the firm to avoid or eliminate them next period, so fixed manufacturing costs should not be recognized as assets
It is also pointed out that use of absorption costing can lead to manipulation of the net income figure by managing levels of production and inventory
what are arguments to use absorption costing instead of variable costing?
he finished goods should bear a fair share of all the costs that were incurred to bring the goods to saleable condition
all costs should be properly included in inventory
the only method allowed in Canada for externally reporting
it is argued that in the long run, variable costing can be misleading for purposes of long-run costing and pricing
