MGT223H5 Chapter Notes - Chapter 08: Variable Cost, Total Absorption Costing, Cash Flow
Document Summary
*under absorption costing, there is an incentive to overproduce because of the constant fixed manufacturing overhead while under variable costing, profit is not affected by production increases. Under absorption costing, treating fixed manufacturing overhead as a variable cost can: Produce positive net operating income even when the number of units sold is less lead to faulty pricing decisions and keep-or-drop decisions than the break-even point. *absorption costing must be used for external financial reports and either variable or absorption costing can be used when filing income tax returns. Variable costing fixed manufacturing costs are capacity costs and will be incurred even if nothing is produced.
