Management Notes Chap 2: o AC – at the time the finished

units are sold

 Product Cost – attributable / directly
o DC – release of FFO as period
associated with the product
costs segregates all costs into
 Period Cost – not related to production;
fixed and variable items
non production costs
 DC is limited to internal use
Absorption Product Cost Period Cost o FFO incurred within a period,
Costing regardless of product, hence it
DM DL VFO FFO VSAE FSAE
Direct Product Cost Period Cost
is a period cost
Costing  Net income may differ because of
variations between production & sales
volume
 Vary depending on what unit
o The longer time frame, the
production cost is applied
methods will be the same
 Total FFO is based on normal capacity
results
o If nothing is stated, assume that
o The shorter, the more they will
it is equal to the actual
differ
production capacity.
o Erratic movement of NI because
 Service / Merchandising companies
of changing inventory levels
have no fixed manufacturing costs
o Just-in-Time Method (JIT)
o Do not make a choice between
 Goods are produced
AC / DC
according to customer’s
 AC generally accepted for external
orders, so inventories
reporting and for preparing income tax
are eliminated
returns
 Little opportunity for
 Inventory under DC is less because of its
FFO to be shifted
treatment to FFO
 NI will essentially be
 Variable Costing
the same regardless of
o Does not include all direct costs
method
as product costs
o Variable direct manufacturing
costs are included
o Includes indirect costs
 Variable indirect
manufacturing cost
o Fixed manufacturing costs &
any non-manufacturing costs
are excluded
 Timing
o When to recognize FFO as an
expense