COMM 305 Chapter Notes - Chapter 8: Income Statement, Total Absorption Costing
16 Mar 2017
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8) alternative inventory costing methods: a decision-making perspective. Absorption costing - where all manufacturing costs charged to product. Variable costing - where only variable manufacturing costs product costs. Fixed manufacturing costs are period costs or expenses. Oh charged as expense in the current period. Current period fixed oh, therefore, not deferred to future periods through the ending inventory. Hence, absorption costing will show higher net income than variable costing whenever more units produced than sold. When units produced and sold same, both approaches" net income will = No increase in ending inventory so current period fixed oh costs not deferred to future periods through ending inventory. Ni under absorption costing higher than ni under vc because cost of ending inventory higher under absorption costing than under vc. Overproduction may increase manager"s compensation, but buildup of inventories will lead to additional costs to company.
