MGM222H5 Lecture Notes - Lecture 8: Total Absorption Costing, Net Income, Income Statement
MARCH 12-MGM222-LEC-ALTERNATIVE INVENTORY COSTING METHODS
Absorption Costing VS. Variable Costing
- Under variable costing, fixed manufacturing overhead is an expense in the current period
- Variable costing does not defer fixed manufacturing overhead to the future
- Income effects (IMPORTANT):
◼
◼ Net income under absorption costing compared to net income under variable costing is:
◆ higher when units produced exceed units sold
◆ Lower when units produced are less than units sold
◆ Equal when units produced and sold are the same
◼ There is no ending inventory so fixed costs are not deferred into the future
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Document Summary
Under variable costing, fixed manufacturing overhead is an expense in the current period. Variable costing does not defer fixed manufacturing overhead to the future. Net income under absorption costing compared to net income under variable costing is: Higher when units produced exceed units sold. Lower when units produced are less than units sold. Equal when units produced and sold are the same. There is no ending inventory so fixed costs are not deferred into the future. Manufacturing costs are ( - ) higher for absorption costing because fixed manufacturing costs are product costs. When units produced exceeds units sold, net income under absorption costing is higher than net income under variable costing. Cost of ending inventory is higher under absorption costing than under variable costing. Does not differentiate between fixed and variable costs. This is why, variable costing is often used for internal decision-making. Net income unaffected by changes in production levels.
