RSM222H1 Lecture : Textbook Notes on Chapter 7-Variable Costing

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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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Document Summary

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. Under absorption, fixed cost are added to inventory account not expensed in income statement. Oh cost released from inventory portion of fixed manu.

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