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Chapter 8

COMM 112 Chapter Notes - Chapter 8: Income Statement, Financial Statement, Matching Principle


Department
Commerce
Course Code
COMM 112
Professor
Jue Wang
Chapter
8

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COMM 612
Week 8
Chapter 8: Variable Costing A Tool for Management
Overview of Absorption and Variable Costing
Variable Costing
A costing method that includes only variable manufacturing costs direct materials,
direct labour, and variable manufacturing overhead in the cost of a unit of product
Direct Costing
Another name for variable costing
Marginal Costing
Another name for variable costing
Income Comparison of Absorption and Variable Costing
Fixed manufacturing overhead cost deferred in inventory
The portion of the fixed manufacturing overhead cost of a period that goes into
inventory under the absorption costing method as a result of production exceeding
sales
Extended Comparison of Income Data
Fixed manufacturing overhead cost released from inventory
The portion of the fixed manufacturing overhead 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
Summary
Variable and absorption costing are alternative methods of determining unit product
costs
Under variable costing, only those production costs that vary with output are treated as
product costs. This includes direct materials; variable overhead; and, ordinarily, direct
labour. Fixed manufacturing overhead is treated as a period cost and charged off against
revenue as it is incurred, the same as selling and administrative expenses.
Under absorption costing, fixed manufacturing overhead is treated as a product cost,
along with direct materials, direct labour and variable overhead; there fore a portion of
fixed manufacturing overhead is assigned to each unit as it is produced. When some
foods remain unsold at the end of the period, some of the fixed manufacturing
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