Podcast
Questions and Answers
How are fixed manufacturing costs treated under marginal costing?
How are fixed manufacturing costs treated under marginal costing?
Which method is typically used for external reporting as required by GAAP?
Which method is typically used for external reporting as required by GAAP?
Which aspect is a key advantage of marginal costing over absorption costing?
Which aspect is a key advantage of marginal costing over absorption costing?
What can cause absorption costing to show different profit results over periods?
What can cause absorption costing to show different profit results over periods?
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What do both absorption and marginal costing methods have in common?
What do both absorption and marginal costing methods have in common?
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What expenses are included in absorption costing?
What expenses are included in absorption costing?
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Which statement best describes marginal costing?
Which statement best describes marginal costing?
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What is the primary advantage of absorption costing?
What is the primary advantage of absorption costing?
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How does marginal costing benefit decision-making?
How does marginal costing benefit decision-making?
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Which formula correctly calculates the cost per unit under absorption costing?
Which formula correctly calculates the cost per unit under absorption costing?
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Which of the following is a drawback of absorption costing?
Which of the following is a drawback of absorption costing?
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How are fixed manufacturing overhead costs treated in marginal costing?
How are fixed manufacturing overhead costs treated in marginal costing?
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What type of costing is primarily used for internal decision-making?
What type of costing is primarily used for internal decision-making?
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Study Notes
Absorption Costing
- Absorption costing, also known as full costing, includes all manufacturing costs (fixed and variable) in the product cost.
- These costs comprise direct materials, direct labor, variable manufacturing overhead, and fixed manufacturing overhead.
- Absorption costing satisfies GAAP requirements for external reporting.
- It determines the total product cost, crucial for inventory valuation and pricing decisions.
- Fixed manufacturing overhead is allocated to units produced using a predetermined overhead rate.
- The absorption costing unit cost formula is: (Fixed manufacturing overhead + Variable manufacturing overhead + Direct materials + Direct labor) / Number of units produced
- Inventory valuation and cost of goods sold (COGS) calculation rely on absorption costing.
- A benefit is its GAAP compliance.
- A drawback is its potential difficulty in understanding cost behavior and performing accurate cost-volume-profit (CVP) analysis.
Marginal Costing
- Marginal costing, or variable costing, only incorporates variable manufacturing costs (direct materials, direct labor, and variable manufacturing overhead) into a product's cost.
- Fixed manufacturing overhead is treated as a period cost, expensed in the period incurred.
- Marginal costing is primarily used for internal decision-making.
- It offers clearer insight into cost behavior.
- Marginal costing aids in break-even point and profit-volume ratio determination.
- The marginal costing unit cost formula is: (Variable manufacturing overhead + Direct materials + Direct labor) / Number of units produced
- It supports short-term decision-making.
- Advantages include simplicity and focus on relevant costs—helpful for decision-making and CVP analysis.
- A disadvantage is its non-compliance with GAAP for external reporting.
Differences between Absorption and Marginal Costing
- Included Costs: Absorption costing includes all manufacturing costs (fixed and variable), while marginal costing incorporates only variable manufacturing costs.
- Inventory Valuation: Absorption costing includes fixed manufacturing overhead in inventory valuation; marginal costing treats it as a period expense, excluding it from inventory.
- External vs. Internal Use: Absorption costing is typically used for external reporting, while marginal costing is more common for internal decision-making.
- Profit Determination: Absorption costing profits can fluctuate due to varying production levels, while marginal costing provides a steadier profitability picture across periods.
- Cost-Volume-Profit (CVP) Analysis: Marginal costing facilitates clearer CVP analysis by isolating variable and fixed costs.
Similarities between Absorption and Marginal Costing
- Both are relevant cost accounting tools.
- Both utilize cost accounting principles.
- Both contribute to calculating cost of goods sold (COGS).
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Description
Explore the methods and principles of absorption costing, which incorporates all manufacturing costs into product pricing. Understand its significance in inventory valuation and how it aligns with GAAP regulations. Delve into the formula and allocation methods used in this accounting approach.
