Chapter 8 alternative Flashcards
Process and Job order costing use what type of costing?
absorption costing
Why does Job order and process costing use absorption costing?
because all manufacturing costs are charged to or absorbed by the product
what else is absorption costing called?
full
what is absorption costing used for?
used for external reporting under GAAP
What are the 3 alternative approaches to absorption costing?
- variable costing
- normal costing
- throughput costing
what is considered product costs in variable costing?
- only DM, DL, and VARIABLE MOH are considered product costs
- fixed costs are expensed as incurred (period costs)
- selling and admin are still considered period costs
What is full or absorption costing used in
process costing and job order
Define variable costing
- only direct materials, dir lab and Variable moh costs are considered product costs
- fixed MOH are recognized as period costs
What are some decision making concerns with
- GAAP requires them to use absorption costing to cost their inventories
- often used internally to evaluate performance, justify cost reductions, or evaluate new products - some companies have recognized that net income calculated using GAAP does not highlight the differences between variable and fixed costs
- may lead to poor decisions
- some use variable costing internally for this reason
What are problems with absorption costing
- when production exceeds sales
1. absorption costing reports a higher net income than Variable costing
2. the reason is that some fixed manufacturing costs are not expensed in the current period, but deferred to future periods as part of the inventory
3. therefore, management may be tempted to over produce in a period in order to increase net income- net income will increase but this may not always be in the company’s best interest
What are the potential advantages of variable costing compared to absorption
- the use of variable costing is consistent with the CVP and incremental analysis
- net income calculated under variable costing is not affected by changes in production levels
- therefore it is much easier to understand the impact of fixed and variable costs in the calculation of net income
- net income is greatly affected by changes in sales levels under VC (not product levels)therefore provides a more realistic assessment of the company’s success or failure during a period
- Because the fixed and variable cost components are shown in the VC income statement, it is easier to identify these costs and understand their effect on the business
- under absorption costing, the allocation of fixed costs to inventory makes it difficult to evaluate the impact of fixed costs on the company’s results
What is normal costing?
- using a predetermined OH rate to assign MOH
- chapter 3
- the use of predetermined OH rate is more practical for assigning fixed MOH costs to production
- *** add more **
What is throughput costing also called
upper-variable costing
How does throughput costing deal with costs
treats all costs as period expense except for direct materials
Describe throughput costing
- modified form of variable costing system treats DL and V MOH as period expenses
