BUS 215 Chapter Notes - Chapter 6: Income Statement, Total Absorption Costing, Fixed Cost
Chapter 6
• Variable and absorption costing include product & period costs
• Variable costing goes with contribution format
• Absorption costing ignores variable and fixed cost distinctions
• Variable costing
o Includes direct material, direct labor, and variable
manufacturing overhead
o Fixed manufacturing overhead is treated as a period cost
• Absorption costing
o All manufacturing costs are product costs
o Its income statement categorizes costs by manufacturing vs.
selling and admin.
• Contribution approach categorizes costs variable vs. fixed
• CVP analysis
o Use income statement format because it separates fixed and
variable costs
• Variable costing income statements
o Straightforward because as sales goes up, so does net income
o Number of units produced does not affect net operating income
• Absorption costing income statements
o Can be easily misinterpreted
• Traceable fixed cost – a fixed cost incurred because of the existence of
the segment
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