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    Product Cost Methods

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    janinasachadelacruz0119
    This document compares absorption costing and variable costing methods. Absorption costing treats both variable and fixed manufacturing overhead as product costs, while variable costing treats fixed manufacturing overhead as a period cost. The main difference is in the treatment of fixed manufacturing overhead - absorption costing includes it in inventory costs, while variable costing expenses it entirely in the period incurred. Variable costing provides a more precise measure of income, as it recognizes that fixed overhead costs will be incurred regardless of production levels.

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    Product Cost Methods

    Uploaded by

    janinasachadelacruz0119
    41 views3 pages
    This document compares absorption costing and variable costing methods. Absorption costing treats both variable and fixed manufacturing overhead as product costs, while variable costing treats fixed manufacturing overhead as a period cost. The main difference is in the treatment of fixed manufacturing overhead - absorption costing includes it in inventory costs, while variable costing expenses it entirely in the period incurred. Variable costing provides a more precise measure of income, as it recognizes that fixed overhead costs will be incurred regardless of production levels.

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    This document compares absorption costing and variable costing methods. Absorption costing treats both variable and fixed manufacturing overhead as product costs, while variable costing treats fixed manufacturing overhead as a period cost. The main difference is in the treatment of fixed manufacturing overhead - absorption costing includes it in inventory costs, while variable costing expenses it entirely in the period incurred. Variable costing provides a more precise measure of income, as it recognizes that fixed overhead costs will be incurred regardless of production levels.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    41 views3 pages

    Product Cost Methods

    Uploaded by

    janinasachadelacruz0119
    This document compares absorption costing and variable costing methods. Absorption costing treats both variable and fixed manufacturing overhead as product costs, while variable costing treats fixed manufacturing overhead as a period cost. The main difference is in the treatment of fixed manufacturing overhead - absorption costing includes it in inventory costs, while variable costing expenses it entirely in the period incurred. Variable costing provides a more precise measure of income, as it recognizes that fixed overhead costs will be incurred regardless of production levels.

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    © All Rights Reserved
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    Product Cost Methods Features of Variable Costing

     Costs are identified variable cost and


    Absorption Costing fixed cost, not COGS and OPEX.
    - also known as full costing method.  Fixed manufacturing overhead is
    - Used in presenting income information treated as a period cost and is charged
    to external users of accounting directly of the entire amount matched
    information, against revenues for that period.
    - In conformity with GAAP.  Variable costing recognizes that only
    - All direct material, direct labor, variable production costs that vary directly with
    - manufacturing overhead and fixed the volume of production shall be
    - manufacturing overhead forms part of “treated” as product cost. Fixed
    the cost of the products. manufacturing overhead shall become a
    - Variable and fixed selling and period cost since whatever level of
    administrative expenses forms part of production, they will still be incurred.
    operating expenses.  Under variable costing, fixed overhead
    - Product costs are split into two – must not become product costs. If in
    finished goods inventory when unsold the event an entity has zero production,
    and cost of goods selling. inventory costs would still amount to
    (same with how things are done in the income the fixed overhead costs itself even id in
    statement) reality, there’s no inventory.

    The main difference between variable costing


    method and absorption costing method is the
    treatment of FIXED MANUFACTURING
    OVERHEAD.
     In absorption costing, fixed
    manufacturing overhead is part of
    product cost. With that, fixed
    Variable Costing manufacturing overhead related to
    - Also known as contribution margin unsold products becomes part of
    approach. finished goods inventory and will only
    - Used in presenting information to be charged against revenue at the point
    internal users of accounting of sale. Thus, in comparison with
    information. variable costing, there is a “deferred
    - Not in conformity with GAAP. fixed overhead” cost not charged
    - Direct materials, direct labor, and all against revenue until products are sold.
    variable costs are deducted to sales to  In variable costing, all fixed
    determine contribution margin. manufacturing overhead is charged and
    - All fixed costs during the period are match against sales, thereby all fixed
    deducted against the contribution overhead is deducted to sales. There is
    margin to determine net income. no deferral of fixed overhead in relation
    (It is to treat costs that are incurred to inventory, this providing a more
    during a no production time as period precise measurement of income on the
    cost.) premise that “whatever the level of
    production and sale, we will still be
    incurring these fixed overhead costs.”
    Pro-forma Statements of Income

    Problem 1 Production = Sales; No ending


    inventory
    Problem 2 Production > Sales; NO beginning Problem 3 Production < Sales; With beginning
    inventory, ending inventory retained and ending inventory

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