Direct and absorption costing
Variable and absorption costing are alternative methods of determining unit product costs. Under variable costing, only those manufacturing costs that vary with output are treated as product costs. This includes direct materials, variable overhead, and ordinarily direct labor. Fixed manufacturing overhead is treated as a period cost and it is expensed on the income statement as incurred. By contrast, absorption costing treats fi xed manufacturing overhead as a product cost, along with direct materials, direct labor, and variable overhead. Under both costing methods, selling and administrative expenses are treated as period costs and they are expensed on the income statement as incurred. Because absorption costing treats fi xed manufacturing overhead as a product cost, a portion of fi xed manufacturing overhead is assigned to each unit as it is produced. If units of product are unsold at the end of a period, then the fi xed manufacturing overhead cost attached to those units is carried with them into the inventory account and deferred to a future period. When these units are later sold, the fi xed manufacturing overhead cost attached to them is released from the inventory account and charged against income as part of cost of goods sold. Thus, under absorption costing, it is possible to defer a portion of the fi xed manufacturing overhead cost from one period to a future period through the inventory account. Unfortunately, this shifting of fi xed manufacturing overhead cost between periods can cause erratic fl uctuations in net operating income and can result in confusion and unwise decisions. To guard against mistakes when they interpret income statement data, managers should be alert to changes in inventory levels or unit product costs during the period.
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- Introduction, Organization and overview of the course.
- concept and classification of costs.
- Cost of goods sold, cost of good manufactured
- Cost of goods sold, cost of good manufactured
- Costing and control of material,
- Costing and control of material,
- costing and control of labour,
- costing and control of labour,
- costing and control of factory over head
- Factory Overhead Departmentalization
- product cost accumulation systems
- product cost accumulation systems
- Job order Costing
- Job order Costing
- Job order Costing
- Job order Costing
- Process costing
- Process costing
- Process costing
- Process costing
- Joint product and by product costing
- Joint product and by product costing
- Joint product and by product costing
- Joint product and by product costing
- Budgeting
- Budgeting
- Budgeting
- Budgeting
- Direct and absorption costing
- Direct and absorption costing
- Break-even analysis and cost-volume-profit analysis
- Break-even analysis and cost-volume-profit analysis
- Chapters 32
- Department Noon Business School
- Teacher
Shahid Mahmood
