RSM322H1 Lecture Notes - Lecture 10: Cubic Yard, Total Absorption Costing, Natural Gas Prices
Document Summary
Criticisms of absorption cost systems: incentive to overproduce. Under absorption costing, manufacturing managers can defer recognition of fixed manufacturing costs by building ending inventory rather than deducting those fixed costs in the year incurred. Expense deducted when items are sold next year. Absorption costing treats fixed manufacturing costs as product costs. When more units are produced than sold and absorption costing is used, some of the fixed costs are allocated to ending inventory (asset account) and become recognized in a future period"s cost of goods sold (expense account). To reduce overproduction, modify the performance evaluation system. To avoid the overproduction incentive of absorption costing, reduce the decision rights of the production managers. Re(cid:373)ove produ(cid:272)tio(cid:374) (cid:373)a(cid:374)ager"s right to (cid:271)uild i(cid:374)ve(cid:374)tory level greater tha(cid:374) a(cid:373)ou(cid:374)t authorized by top management. Just-in-time (jit) production so that customer orders drive inventory. Re(cid:373)ove produ(cid:272)tio(cid:374) (cid:373)a(cid:374)ager"s right to (cid:271)uild i(cid:374)ve(cid:374)tory level greater tha(cid:374) a(cid:373)ou(cid:374)t ordered by customers.
