COMMERCE 2AB3 Chapter Notes - Chapter 8: Total Absorption Costing, Illus
27 Apr 2018
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M Chapter 8
Inventory Costing Method
- Full/ Absorption Costing: All manu. Costs are charged to, or absorbed by, the product
o Approach used for external reporting under generally accptd. Acct. principles
o Fxd. MOH is a product cost (NOT IN THE IS)
- Variable Costing: only direct materials, DL and Var. MOH are considered product costs
o Fxd. MOH are recognized as pd. Costs (expenses) when incurred (in the IS)
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o S/ A expenses fall under pd. Costs under both cost method
- Illustration Comparing Absorption Costing and Var. Costing
o Eg. Pre. Products Corp. aufactures a pol… sealat called Fi-it for car
windshields
o
o Absorption Costing Illus.
▪ COGM= Units x Manu. Cost/ unit
▪ V. S/A Exp= units sold x s/a cost
o Income Stmt.
▪ Fxd. Overhead cost is charged to a future pd. As part of cost of ending
inv.
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Document Summary
Costs are charged to, or absorbed by, the product: approach used for external reporting under generally accptd. Moh is a product cost (not in the is) Variable costing: only direct materials, dl and var. Costs (expenses) when incurred (in the is: s/ a expenses fall under pd. Products corp. (cid:373)a(cid:374)ufactures a pol(cid:455) seala(cid:374)t called fi(cid:454)-it for car windshields: absorption costing illus, cogm= units x manu. Cost/ unit: v. s/a exp= units sold x s/a cost. Overhead cost is charged to a future pd. As part of cost of ending inv: variable costing illus, cost-volume-profit format is used to build is, var. Cost= units x cost: main difference, under var. costing, the fxd. Is charged as an expense in the current pd: fxd. Overhead costs are not deferred to later dt: thus, absorption cost will show a higher net income than variable costing whenever there are more units produced than sold.
