Variable Costing—A Tool for Management Show
Learning Objectives
Chapter Overview A. Overview of Variable and Absorption Costing. At least two methods can be used in manufacturing companies to value units of product for accounting purposes—absorption costing and variable costing. These methods differ only in how they treat fixed manufacturing overhead costs.
B. Comparison of Absorption and Variable Costing. When comparing absorption costing and variable costing income statements, a number of points should be noted:
C. Extended Comparison of Income Data. Exhibit 7-3 in the text presents a comparison of absorption costing and variable costing income statements over three years in which production is constant but sales vary. Exhibit 7-6 in the text also presents comparative income statements over three years but holds annual sales constant and varies annual production. From these Exhibits, several generalizations can be drawn. (All of these generalizations assume the LIFO inventory flow assumption is being used. The generalizations may not hold in some rare cases if a company uses an inventory flow assumption other than LIFO.)
D. The Matching Principle. Accountants and managers have been arguing for decades concerning the relative merits of absorption and variable costing. In practice, absorption costing is used far more than variable costing even for internal reports. The reasons for this are not entirely clear, although the perception that absorption costing is required for external reporting undoubtedly plays a key role. The argument for using absorption costing in external reports seems to be based on the matching principle.
E. Advantages of the Contribution Approach. There are a number of advantages to using variable costing (and the contribution approach) in internal reports and analysis.
F. Impact of JIT Inventory Methods. When companies use JIT methods for controlling their operations, the distortions of income that can occur under absorption costing largely (or completely) disappear.
How is operating income affected if the number of units sold exceeds the number of units produced quizlet?Terms in this set (27) How is operating income affected if the number of units sold exceeds the number of units produced? Operating income would be higher under a variable costing income statement.
Is operating income affected by changes in production under absorption costing?Under absorption costing, reported net operating income is affected by changes in production since fixed costs are spread across more or fewer units.
When all of the units produced are sold the operating income?When all of the units produced are sold, the operating income is the same under both the absorption and variable costing methods. Assume no beginning and ending inventories.
When units produced exceed units sold net income will generally be costing?If the number of units produced exceeds the number of units sold, then net operating income under absorption costing will: be equal to the net operating income under variable costing.
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