Question

Let’s think about acompany that produces dinner ware (plates, bowls, cups and saucers,for example). Some of the dinner ware is intended for daily use(stoneware that is dishwasher and microwave safe), and other dinnerware is for special occasion (fine china or bone china, with goldtrim that cannot go in the microwave!) Daily use dinnerware is lessexpensive than special occasion dinnerware. Imagine that there isconsistent demand year-round for the “daily use” dinnerware, butthere are seasonal spikes in demand for the “special occasion”dinnerware (i.e. wedding season and the holiday season).Additionally, gold is an important component of special use dinnerware, yet the price of gold varies.

Explain how fixedmanufacturing overhead costs are shifted from one period to anotherunder absorption costing. Would you recommend absorption costingfor the daily dinner ware, the special occasion dinner ware, orboth?

What arguments arethere in favor of treating fixed manufacturing overhead costs asproduct costs? As period costs?

Under absorptioncosting, how is it possible to increase net operating incomewithout increasing sales? Explain using the dinner wareexample.