Discusstion Questions

Deborah Bednar

Discussion Question 12

1.) Direct materials, Direct labor, Fixed manufacturing overhead and Variable manufacturing

Absorption costing is a costing system, which treats all costs of production as product costs, regardless weather they are variable or fixed. Absorption costing allocates a portion of fixed manufacturing overhead cost to each unit of product, along with the variable manufacturing cost. Because absorption costing includes all costs of production as product costs, it is frequently referred to as full costing method.

Variable costing is a costing system under which those costs of production that vary with output are treated as product costs. This would usually include direct materials, direct labor and variable portion of manufacturing overhead. Fixed manufacturing cost is not treated as a product costs under variable costing. Rather, fixed manufacturing cost is treated as a period cost and, like selling and administrative expenses, it is charged off in its entirety against revenue each period. The cost of a unit of product in inventory or cost of goods sold under this method does not contain any fixed overhead cost. Variable costing is some time referred to as direct costing or marginal costing.

2.) Absorption costing is used for external reporting and income tax reporting. Practically speaking, variable costing cannot be used externally for either financial or tax reporting. It is used internally by managers for planning and control purposes. A company could use absorption costing to see future revenue while using variable costing to cost products and services.

3.) Phantom profits are ignored. Profit resulting from inventory buildup, not sales, is ignored. When absorption method reports phantom profits, it fails to account for expenses related to carrying the additional inventory. Cost-volume-profit relationship: Facilitates c-v-p analysis by separating cost behavior, Aids management in solving problems involving...