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RSM222H1 (35)

Chapter eight.docx

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Rotman Commerce
Stojanovic Dragan

Chapter eight variable costing a tool for managementOverview of absorption and variable cost Absorption costing assigns both variable and fixed costs to productsthe bully them in a way that makes it difficult for managers to distinguish between themVariable costing focuses on cost behavior clearly separating fixed from variable costs One of the strength of variable costing is that it harmonize with both the contribution approach and the cost volume profit concept Absorption costingAbsorption costing treats all manufacturing costs as product cost of regardless of whether their variable and fixed The cost of a unit of product under the absorption costing method that the group consists of direct materials direct labor and both variable and fixed manufacturing overheadTherefore absorption costing allocates a portion of fixed and veggie overhead cost to each unit of product along with the variable manufacturing cost and because cost includes all manufacturing cost as product cost it is also referred as full costing Variable costing variable costing a costing method that includes only variable manufacturing costdirect materials direct labor and variable manufacturing overheadin the cost of a unit of productFixed manufacturing overhead is not treated as a product cost under this profit better fixed manufacturing overhead is treated as period cost like selling and administrative expenses and it is expensed in its entirety as revenue eachcost of unit of product in inventory or the cost of goods sold under the variable cost and market does not take a fixed overhead costsDirect costing or marginal costing is another name for variable cost Selling and administrative expenseUnder either absorption or of variable cost the failing in administrative expenses are always treated as period cost expenses and deducted from revenues as they occur exhibit 81 cost classifications absorption vs Variable costing Unit cost computations read the example below to understand betterIncome comparison of absorption and variable cost 1
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