RSM222H1 Lecture 7: Class 7

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In absorption costing we put all the manufacturing cost into product costs. In variable costing we treat fixed manufacturing overhead into period costs. Absorption cost - + (fixed mfg overhead) Variable costing - + sh (fixed mfg overhead) fixed mfg assigned to period costs. Assume that 20,000 units were sold at each. Under absorption costing, fixed manufacturing overhead deferred in inventory. Expenses are incurred but not expensed on income statement until product is sold under absorption costing. Total revenue for the two years are the same but the ,000 in the fixed manufacturing expense is deferred in year 1 in absorption costing. In the short run, there could be discrepancies in the cost/revenue. Sales remain the same and no change in the cost structure, companies can show more profit by producing more units. As production increases, more fixed costs remain (deferred) in inventory of the balance sheet.

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