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Absorption Cost

by: Anna Notetaker

Absorption Cost ACCT

Anna Notetaker
GPA 3.62

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Absorption and Traceable Fixed Costs
Managerial Accounting
Monica Davis
Class Notes
25 ?




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This 2 page Class Notes was uploaded by Anna Notetaker on Saturday September 24, 2016. The Class Notes belongs to ACCT at Middle Tennessee State University taught by Monica Davis in Fall 2016. Since its upload, it has received 10 views.


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Date Created: 09/24/16
Managerial Accounting  Absorption costing defers to the expensing of fixed MOH cost by keeping them in the inventory account until the units are sold. o Under absorption costing, fixed MOH costs don’t go to the income statement until the units are sold and CGS is reported. But variable costing expenses the entire amount of fixed MOH costs in the period incurred.  Note that all the units in inventory have been sold by the end of March, so all of the fixed MOH costs have been expensed for both costing methods.  Note that the net income for the three months totals to the same amount for both costing methods.  Note that January operating income is the same for both methods. The reason for this is because the inventory levels stay the same –  Note that February operating income is higher for absorption costing. This occurs because some fixed OH remains in the inventory, which increases the inventory level.  Note that March’s operating income is higher for variable costing. The reason for this is because the decreased inventory level, which results from fixed income that went to CGS and all Fixed OH.  A variable costing income statement makes CVP analysis easier.  All costing have alreaded been divided into fixed and variable classes.  Variable costing makes it easier to see how changes in sales volume affect operating income. o Sales increase = Operating income increase o Sales decrease = Operating income decrease o Sales same = Operating income same  The true cost of producing one more unit, the variable cost per unit, is very clear on the variable costing income statement and the constancy of fixed OH costs is clearer on the variable costing income statement.  Most companies use absorption costing because GAAP and IFRS requires it, and it is too costly to maintain two separate costing systems. o Since variable costing has so many advantages, why doesn’t GAAP require it?  Tradition  Because managers and accountants believe absorption costing does a better job of matching cost with revenues.  They believe all manufacturing costs should be assigned to the product, including the fixed OH costs.  Business Segment – any part of activity (division) of a company for which managers seek revenue, cost, or profit data.  Traceable fixed cost is a fixed cost that is incurred because of the existence of the segment. o If the segment were eliminated, the fixed cost would disappear.  Common fixed cost – a fixed cost that supports the operations of more than one segment, but is not traceable to any one segment.  Segment Margin – the segment contribution margin minus the segment’s traceable fixed cost. o The segment margin is the best gauge of the long-run profitability of a segment because it is calculated with only the cost of the segment. o If a segment can’t cover its own costs, then than segment probably should be eliminated. o It is possible to segment a business into several levels.  Decision making using segment reporting.


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