EXAM 2 - CH 9 Flashcards
What is the difference between Variable and Absortion costing for…
Sales
it is unaffected
What is the difference between Variable and Absortion costing for…
COGS
Variable does not include FOH into COGS and instead considers it a period cot
Absorption costing - allocates and applies it
How does absoprtion costing treat FOH
it allocates/absorbs the FOH to units produced and then when product is sold we recognize as COGS
how does variable costing treat FOH
as a period cost and it is recognized when it is incurred regardless of how many items are sold
for variable costing what variable cost is not included in COGS
variable period cost i.e commisions
does variable costing gross margin = contribution margin
not necessarily because variable period costs like commissions make the difference
the variable cost/unit will always be ________ than absorption cost/unit
less than because it dosn’t include FOH
In absorption costing, if units produced> units sold then the % of FOH is
not all of the FOH is represented in the COGS ratio so O.I under absorption will be greater because all of FOH would have been recognized in variable costing
In absorption costing, if units produced < units sold then the % of FOH is
100% of the FOH in the COGS is recognized and some of last years FOH will be recognized making COGS more expensive and lowering O.I
In absorption costing, if units produced = units sold then the % of FOH is
equal to the amount recognized for variable costing and therefor the O.I will be the same
Why is absorption costing
GAAP?
because it follows the matching principal
What are things that combat overproducing?
- Use variable costing for Internal decision making and performance evaluation
-have a budged BS and IS
- Investigate overages/buildup of inventory and charge managers a holding cost for excess cash tied up in inventory
- use longer evaluation periods
- include non-financial performance measures`
