Textbook Notes on Chapter 7-Variable Costing

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Published on 5 Aug 2010
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Chapter 7 ± Variable Costing: A Tool for Management
Absorption Costing (full cost method) ± includes all manu. costs ± direct materials, direct
labour, BOTH fixed/variable manu. OH ± in the cost of a unit of productn (predominant method
in Canada)
Variable Costing ± includes only variable manu. costs ± direct materials, direct labour, variable
manu. OH ± in the cost of a unit of product
- absorption costing does not support CVP analysis
- production = sales; e.g. JIT
- under absorption, fixed cost are added to inventory account NOT expensed in income
statement
Fixed manu. OH cost released from inventory ± portion of fixed manu. OH cost of a prior
period that becomes an expense of the current period under the absorption costing method as a
result of sales exceeding production
Relation betweenEffectRelation between
production on variable and
and sales iniventory absorption income
Inventory Absorption
Production > Sales
increases >
Variable
Inventory
Absorption
Production < Sales decreases
<
Variable
Absorption
Production = Sales No change
=
Variable
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