Chapter 5

Cost Behavior:
Analysis and Use
 Learning Objective
LO1

To understand how fixed and

variable costs behave and
how to use them to predict
costs.
 Types of Cost Behavior Patterns
Recall the summary of our cost behavior
discussion from Chapter 1.
Summary of Variable and Fixed Cost Behavior
Cost In Total Per Unit

Variable Total variable cost is

proportional to the activity
level within the relevant range.

Total fixed cost remains the

same even when the activity Fixed cost per unit goes
Fixed level changes within the down as activity level goes
relevant range. up.
 The Activity Base

UUnniiti Machine
ttss hours
pprrooddu
ucceedd A measure of what
causes the
incurrence of a
variable
vari cost

Miles Labor

driven hours
 True Variable Cost Example
A variable cost is a cost whose total dollar amount
varies in direct proportion to changes in the
activity level. Your total long distance telephone
bill is based on how many minutes you talk.
Total Long Distance
Telephone Bill

Minutes Talked
 Types of Cost Behavior Patterns
Recall the summary of our cost behavior
discussion from Chapter 1.
Summary of Variable and Fixed Cost Behavior
Cost In Total Per Unit

Variable Total variable cost is Variable cost per unit remains

proportional to the activity the same over wide ranges
level within the relevant range. of activity.

Total fixed cost remains the

same even when the activity Fixed cost per unit goes
Fixed level changes within the down as activity level goes
relevant range. up.
 Variable Cost Per Unit Example
A variable cost remains constant if expressed
on a per unit basis. The cost per minute talked
is constant. For example, 10¢ per
minute.

Telephone Charge
Per Minute

Minutes Talked
 Extent of Variable Costs
The proportion of variable costs differs across
organizations. For example . . .
A public utility with
large investments i n A manufacturing company
equipment wi l tend wi l often have many
to have fewer
variable costs.
variable costs.

A merchandising company
A service company
wi l norma ly have a high usua ly wi l have a high
proportion of variable costs. proportion of variable costs
 Examples of Variable Costs
11.Merchandising
1. . MMerercchhaandcompaniesndiisisingng com–com paniofpani
cost eses –sold.
goods
coscostt o fof goodsgoods ssolold.d.
2. Manufacturing companies – direct materials,
22..direct
MManuflabor,anufaacand
tcturur iingng com
variable companipanieses –
overhead.
didirrectectmmatatereriiaalls,s, didirrectect llababoorr,,
3. Merchandising
andand vvarariiaabland e
bl e
manufacturing
over overhead. companies
head.
–
commissions, shipping costs, and clerical
33.costs
. such
M Mereras
cchinvoicing.
haandndiisisingng andand
4. Service
mmanufanufcompanies
aactctururiing–ngsupplies,
comcomtravel,
panipaniand
eses –
clerical.
comcommmiisssisionsons,, shishippippingng coscostts,s,
andand clclereriicalcal coscosttss sucsuchh aass
 True Variable Cost
Direct materials is a true or proportionately
variable cost because the amount used during
a period will vary in direct proportion to the
level of production activity.
Cost

Volume
 Step-Variable Costs
A resource that is obtainable only in large chunks (such
as maintenance workers) and whose costs increase or
decrease only in response to fairly wide changes in
activity is known as a step-variable cost.
Cost

Volume
 Step-Variable Costs

Small changes in the level of production are

not likely to have any effect on the number of
maintenance workers employed.
Cost

Volume
 Step-Variable Costs
Only fairly wide changes in the activity level will
cause a change in the number of maintenance
workers employed
Cost

Volume
The Linearity Assumption and the
Relevant Range

Economist’s A straight line

closely
Curvilinear Cost approximates a
Function curvilinear
variable cost
line within the
Relevant
relevant range.
Total Cost

Range
Accountant’s Straight-Line
Approximation (constant
unit variable cost)

Activity
 Types of Cost Behavior Patterns
Let’s look at fixed cost behavior on the next
screens.
Summary of Variable and Fixed Cost Behavior
Cost In Total Per Unit

Variable Total variable cost is Variable cost per unit remains

proportional to the activity the same over wide ranges
level within the relevant range. of activity.

Total fixed cost remains the

same even when the activity Fixed cost per unit goes
Fixed level changes within the down as activity level goes
relevant range. up.
 Total Fixed Cost Example
A fixed cost is a cost whose total dollar amount remains
constant as the activity level changes. Your monthly
basic telephone bill is probably fixed and does not
change when you make more local calls.
Monthly Basic
Telephone Bill

Number of Local Calls

 Types of Cost Behavior Patterns
Recall the summary of our cost behavior
discussion from Chapter 1.
Summary of Variable and Fixed Cost Behavior
Cost In Total Per Unit

Variable Total variable cost is Variable cost per unit remains

proportional to the activity the same over wide ranges
level within the relevant range. of activity.

Total fixed cost remains the

same even when the activity Fixed cost per unit goes
Fixed level changes within the down as activity level goes
relevant range. up.
 Fixed Cost Per Unit Example
Average fixed costs per unit decrease as the activity
level increases. The fixed cost per local call
decreases as more local calls are made.

Monthly Basic Telephone

Bill per Local Call

Number of Local Calls

 Types of Fixed Costs

Committed Discretionary
Long-term, cannot be May be altered in the
significantly reduced
d short-term by
in the short-term. current
a managerial
decisions

Examples Examples
Depreciation on Advertising and
Buildings and Research and
Equipment and Development
Real Estate Taxes
 The Trend Toward Fixed Costs
The trend in many industries is toward
greater fixed costs relative to variable costs.
AsAAmachines
ss mmachitake achinnesover
es Knowledge
KKnownowllworkersedgeedge
many ttake ake ovovertasks
mundane er tend w towbe ororksalaried,
erkerss
previously performed highly-trained and
mmaanymnymundaneundane ttendend ttoobebe
by humans, difficult to replace. The
“knowledge ttaskasworkers”
kss sscost
alalarto
ariied, ed,hihighlghly-y-
compensate
are demanded for these valued employees
prprevieviouslouslyy ttrraiainedned andand
their minds rather is relatively fixed
per
thanperftheir
forormmuscles.
meded byby ddiifthan
rather fffiiccul ulttttoo
variable.
huhummans,ans, rrepleplaceace.. TThehe
Is Labor a Variable or a Fixed Cost?
The behavior of wage and salary costs can
differ across countries, depending on
labor regulations, labor contracts, and
custom.
In France, Germany, China, and Japan,
management has little flexibility in adjusting
the size of the labor force.
Labor costs are more fixed in nature.
In the United States and the United Kingdom,
management has greater latitude. Labor costs
are more variable in nature.
 Fixed Costs and Relevant Range

90
Thousands of Dollars

Total cost doesn’t

Rent Cost in

Relevant change for a wide

60 range of activity, and
Range
then jumps to a new
higher cost for the
30 next higher range of
activity.
0
0 1,000 2,000 3,000
Rented Area (Square Feet)
 Fixed Costs and Relevant Range
The relevant range of activity for a fixed cost
is the range of activity over which the graph of
the cost is flat.
EExxamamOffice
Example: plple:e:OspaceOffffiiceis
ce
availablesspat aceepaca irental
iss rate
ofavai
$30,000 l abl per
avai l abl e at a e year
at ain
increments of 1,000
rrentfeet.
square entalalrratateeAs ofofthe
business
$30,$30,000 grows, more
000 perper
space is rented,
increasingyyear the iinn cost.
eartotal
Fixed Costs and Relevant Range

Step-variable costs
can be adjusted
How does this more quickly and . . .
type of fixed cost The width of the
differ from a step- activity steps is
much wider for the
variable cost? fixed cost.
 Quick Check 
Which of the following statements about
cost behavior are true?
1. Fixed costs per unit vary with the level of
activity.
2. Variable costs per unit are constant within
the relevant range.
3. Total fixed costs are constant within the
relevant range.
4. Total variable costs are constant within the
relevant range.
 Quick Check 
Which of the following statements about
cost behavior are true?
1. Fixed costs per unit vary with the level of
activity.
2. Variable costs per unit are constant within
the relevant range.
3. Total fixed costs are constant within the
relevant range.
4. Total variable costs are constant within the
relevant range.
 Mixed Costs
A mixed cost has both fixed and variable
components. Consider your utility costs.

Y
Total Utility Cost

ost
d c
i xe
l m
ta
To Variable
Cost per KW

X Fixed Monthly
Activity (Kilowatt Hours)
Utility
Charge
 Mixed Costs

Y
Total Utility Cost

ost
d c
i xe
l m
ta
To Variable
Cost per KW

X Fixed Monthly
Activity (Kilowatt Hours)
Utility
Charge
 Mixed Costs Example
IfIf
If your
youryour ffiixmonthly
fixed xededmmutility
oonthlycharge
nthyl ututiility cchhyour
islity$40, argargee
variable cost is $0.03issi $40$40
per,, your
kilowatt
your hour, and your
monthly activity level is 2,000 kilowatt hours,
variablevariable cocostst isis $0.$0.0303 pperer kilowkoliwaattt
what is the amount of your utility bill?
hohour,ur, andand yoyourur mmontonthlyhly activityactivity
Yll iis=s2,000
leveleve a +2,000bX
kikilolowwattat hhourours,s,
wwhathat Y =the$40
isis the +ou($0.03
amamou ×your
ntntofof your 2,000)
utiliutilittyy

Y = $100billbil ??
 Analysis of Mixed Costs
AAcccountAnalysis
Account count AAnaland
nalyythe
sisissEngineering
andand tthehe Approach
EEnginginneeeerriingng AApppprroachoach

Each account is classified as either

variable or fixed based on the analyst’s
knowledge of how the accccoount
behaves.

Cost estimates are based on an

evaluation of production methods, and
material, labor and overhead
requirements.
 Learning Objective
LO2

To use a scattergraph plot

to diagnose cost
behavior.
 The Scattergraph Method
Plot
PPlthe
lotottdata points
thehe dat dataaon a graph
poipointntss
(totalononcost
aa grvs.
grapactivity).
aphh
Y
20 ((ttototalal coscostt vsvs..
Maintenance Cost
1,000’s of Dollars

* act acti i
*vivittyy))..
*
10 * *

0 X
0 1 2 3 4
Patient-days in 1,000’s
 The Scattergraph Method
Draw ainawline
DDraalrliw neettthrough
hhrroouuthe
gghtdata
thhhed epoints
daattapa with
pooiiaboutnnttss an
wwiitthnumbers
equal haabboouof utatpoints
ann above and below the
line. Y
eeqquuaanlnl uummbbeoeborsbfsrfpepeolloiotitnwhnhwte
ts
aesallniainbndbedoeo.v. vee
20
Maintenance Cost
1,000’s of Dollars

* *
*
10 * *

0 X
0 1 2 3 4
Patient-days in 1,000’s
 The Scattergraph Method
Use
UUsone
eseoodata
nneepoint
ddaattto
aaestimate
ppooiinntttthe
tooetotal level
eststiim maaof
tteactivity
etthhee
ttoottaaand
lllleethe
vveetotal
llooffcost.
aactctiivviittyy

Y Totalamaintenance
annddtthheettoottaall cocostst..
cost = $11,000
20
Maintenance Cost
1,000’s of Dollars

* *
*
10 * *
Intercept = Fixed cost: $10,000

0 X
0 1 2 3 4
Patient-days in 1,000’s
Patient days = 800
 The Scattergraph Method
Make aM
quick
Maakeestimate
keaaqquuiof
ickcvariable
keeststiimcost
maattper
eeounit
off and
vvaarrdetermine
iiaabblleecothe
coststcost
ppeeequation.
rruunniittaanndd
ddeetteermm r iinneetthheecocostst eeqquuaatt$iio11,000
Total maintenance at 800 patients
onn..
Less: Fixed cost 10,000
Estimated total variable cost for 800 patients $
1,000

$1,000
Variable cost per unit = 800 = $1.25/patient-
day
YY==$10,000 =$10,$10,000 000 ++
+ $1.25X
$1.1$25XX52
TTootmaintenance
Total taall cost NNuummof
Number bbpatient
eerr oofdays
f
mmaaiinntteennaanncce ppaattiieenntt ddaayyss
e ccoosstt
 Learning Objective
LO3

To analyze a mixed cost

using the high-low method.
 The High-Low Method
Assume the following hours of maintenance work
and the total maintenance costs for six months.
The High-Low Method
TThe
Thehevavarriiabcost
variable abllee
percoscostt of
hour
perper hourhour
maintenance is
offo change
equal to the
inmcost
maiai ntntenan
divided by
ceenance
the change iniihours.
ss
equalHours
equal tTotal
too Cost
High 800 $
tthhee cchange 9,800
iinn
Low 500 7,400
Change ccost
300 ost $
2,400
didivviided
$2,400 ded byby
= $8.00/hour
300
tthehe cchangehange
 The High-Low Method

Total Fixed Cost = Total Cost – Total Variable Cost

Total Fixed Cost = $9,800 – ($8/hour × 800 hours)
Total Fixed Cost = $9,800 – $6,400
Total Fixed Cost = $3,400
 The High-Low Method

The Cost Equation for Maintenance

Y = $3,400 + $8.00X
 Quick Check 

Sales salaries and commissions are $10,000

when 80,000 units are sold, and $14,000 when
120,000 units are sold. Using the high-low
method, what is the variable portion of sales
salaries and commission?
a. $0.08 per unit
b. $0.10 per unit
c. $0.12 per unit
d. $0.125 per unit
 Quick Check 

Sales salaries and commissions are $10,000

when 80,000 units are sold, and $14,000 when
120,000 units are sold. Using the high-low
method, what is the variable portion of sales
salaries and commission?
a. $0.08 per unit
Units
b. $0.10 per unit High level Cost
120,000 14,000
c. $0.12 per unit Low $ 10,000
level 80,000
40,000 $
d. $0.125 per unit 4,000
Change
$4,000 ÷ 40,000 units
= $0.10 per unit
 Quick Check 

Sales salaries and commissions are $10,000

when 80,000 units are sold, and $14,000 when
120,000 units are sold. Using the high-low
method, what is the fixed portion of sales
salaries and commissions?
a. $ 2,000
b. $ 4,000
c. $10,000
d. $12,000
 Quick Check 

Sales salaries and commissions are $10,000

when 80,000 units are sold, and $14,000 when
120,000 units are sold. Using the high-low
method, what is the fixed portion of sales
salaries and commissions?
a. $ 2,000
b. $ 4,000
c. $10,000
d. $12,000
Least-Squares Regression Method
A method used to analyze mixed costs if a
scattergraph plot reveals an approximately linear
relationship between the X and Y variables.
This
TThhmethod
issi usesmmeall ofhothe
etth odd
uusdata
seespoints
saal l ooto ffthhtestimate
ee
the fixed and variable
ddaacomponents
cost taat ppooinni tsst oftto ao
eestiistmmixed
mmmaaxi xte dd thht ee The goal of this method is
cost.
i eete
cocostst.. TThhee ggooaallooffththissi
fiifxxeedd aanndd to fit amstraight meethht oline
oddissto
i the
data that minimizes the
vavarriaai bbleel cocostst to to fitfit aastrstraaigg
i hhttllinni ee
sum of the squared errors.
cocommppoonneenntsst totohthtee ddaataat thht aatt
ooff aa mminni imm
i izeziesstthheesusumm
Least-Squares Regression Method
 Software can be used
to fit a regression line
through the data points.
 The cost analysis
objective is the same:
Y = a + bX

The output from the regression analysis can be

used to create an equation that enables you to
estimate total costs at any activity level.
Comparing Results From the Three Methods
The Tthree
Thehetmethods
thrhreeee mjust
metediscussed
thodshods jjustprovide
ust
didiscusscuestimates
slightly different ssedsed prprovi ddeefixed and
ofovithe
variable cost components of the mixed cost.
sslliigghthtllyydidiffffeerrentent estestiimmatateses ofof
This is to be expected because each
tthehe ffiixxeded andand vavarriiabablleecoscostt
method uses different amounts of the data
comcom ponent
points toponentss ofofestimates.
provide tthheemmiixxeded
ccostost..provides the most
Least-squares regression
accurate estimate because it uses all the data
TThihissiissttoopoints.
bebeexexpectpecteded
becabecauseuse eacheach mmeetthhoodduusseses
 Learning Objective
LO4

To prepare an income
statement using the
contribution format.
The Contribution Format Income Statement

Let’s put our

knowledge of cost
behavior to work by
preparing a
contribution format
income statement.
 The Contribution Format
Total Uni
Sales Revenue $ $t 50
Less: Variable costs 100,000 30
Contribution margin 60,000
$ $
Less: Fixed costs 40,000 20
Net operating income $ 30,000
10,000

TThe
Thehecontribution margin
contcontrriibutbut format
iionon m maarremphasizes
giginnfforormmatat
emme phh
cost behavior. Contribution paasiiszmargin
zesse covers fixed
costs and provides for income.
ccostost behavbehaviioror.. CContontrriibutbutiioonn
 Uses of the Contribution Format
TheThe
The contcontrriibutincome
contribution butiioonnstatement
iincomncomeformat
e is used
stas
statanateminternal
emententfplanning
forormmatatand iiss used
decision
used making tool.
asas ananiWe intnter ernal
will use plplanni
nal this anningng for:
approach andand
decidecissiiononmmakakiingng ttoolool..
1. Cost-volume-profit analysis (Chapter 6).
WeWewwiillllususeetthihiss aapppprroachoach
2. Budgeting (Chapter 7).
fforor::
3. Special decisions such as pricing and make-or-
buy analysis (Chapter 11).
1.. CCosostt-vvololumume-e-prprofofiitt analanalyyssiiss
((CChapthapterer 6)6)..

22..BBuudgdgeettiingng((CChapthapterer 7)7)..
 The Contribution Format
Comparison of the Contribution Income Statement
with the Traditional Income Statement
Traditional Approach Contribution Approach
(costs organized by function) (costs organized by behavior)
Sales $ 100,000 Sales $
Less cost of goods sold 70,000 100,000
Gross margin $ Less variable expenses 60,000
30,000 Less operating expenses Contribution margin $ 40,000
20,000 Net operating income $ Less fixed expenses
10,000 30,000 Net operating income $
10,000

Used primarily for Used primarily by

external management.
reporting.
 Learning Objective
LO5

To use variable costing to

prepare a contribution format
income statement and
contrast absorption costing
and variable costing.
(Appendix 5A)
Appendix
Chapter5A
5

Variable Costing
 Overview of Absorption
and Variable Costing

Absorption Variable
Costing Costing
Direct Materials

Direct Labor Product

Product Costs
Costs Variable Manufacturing Overhead

Fixed Manufacturing Overhead

Variable Selling and Administrative Expenses Period

Period Costs
Costs Fixed Selling and Administrative Expenses
 Quick Check 
Which method will produce the highest values
for work in process and finished goods
inventories?
a. Absorption costing.
b. Variable costing.
c. They produce the same values for these
inventories.
d. It depends.
 Quick Check 
Which method will produce the highest values
for work in process and finished goods
inventories?
a. Absorption costing.
b. Variable costing.
c. They produce the same values for these
inventories.
d. It depends.
 Unit Cost Computations
Harvey Company produces a single product
with the following information available:
Number of units produced annually 25,000
Variable costs per unit:
Direct materials, direct labor,
and variable mfg. overhead $ 10
Selling & administrative expenses $ 3

Fixed costs per year:

Manufacturing overhead $
Selling & administrative 150,000
expenses $
100,000
 Unit Cost Computations
Unit product cost is determined as follows:
Absorptio Va ria ble
n
Direct materials, direct labor, Costing Costing
and variable mfg. overhead
Fixed mfg. overhead $ 10 $
($150,000 ÷ 25,000 units) 6 10 -
Unit product cost $ 16 $ 10

Selling and administrative expenses are

always treated as period expenses and deducted
from revenue as incurred.
 Income Comparison of
Absorption and Variable Costing
Let’s assume the following additional
information for Harvey Company.
 20,000 units were sold during the year at a
price of $30 each.
 There were no units in beginning
inventory.

Now, let’s compute net operating

income using both absorption
and variable costing.
 Absorption Costing
Absorption Costing
Sales (20,000 × $30) $ 600,000
Less cost of goods sold:
Beginning inventory $ -
Add COGM (25,000 × $16) 400,000
Goods available for sale 400,000
Ending inventory (5,000 × $16) 80,000 320,000
Gross margin 280,000
Less selling & admin. exp.
Variable (20,000 × $3) $ 60,000
Fixed 100,000 160,000
Net operating income $ 120,000
 Variable Costing
Variable
manufacturing
Variable Costing
costs only.
Sales (20,000 × $30) $
Less variable expenses: 600,000
Beginning inventory $ -
Add COGM (25,000 × $10) 250,000
All fixed
Goods available for sale 250,000 manufacturing
Less ending inventory (5,000 × $10) 50,00 overhead is
Variable cost of goods sold 0
200,000 expensed.
Variable selling & administrative
expenses (20,000 × $3) 60,000 260,000
Contribution margin 340,000
Less fixed expenses:
Manufacturing overhead $ 150,000
Selling & administrative expenses 100,000 250,000
Net operating income $ 90,000
 Income Comparison of
Absorption and Variable Costing
Let’s compare the methods.
Cost of
Ending Period
Goods Inventory Expens Total
Absorption costing Sold e
Variable mfg. costs $ $ 50,000 $ - $
Fixed mfg. costs 200,000 30,000 - 250,000
120,000 $ 80,000 $ - 150,000
$ $
Variable costing 320,000 400,000
Variable mfg. costs $ $ 50,000 $ - $
Fixed mfg. costs 200,000
- - 150,000 250,000
$ $ 50,000 $ 150,000
200,000 150,000 $
400,000
 Comparing the Two Methods
We can reconcile the difference between
absorption and variable income as follows:
Variable costing net operating income $
Add: Fixed mfg. overhead costs 90,000
deferred in inventory
(5,000 units × $6 per unit) 30,000
Absorption costing net operating income $
120,000

Fixed mfg. Overhead = $150,000 = $6.00 per unit

Units produced
25,000 units
Extended Comparison of Income Data
Here is information about the operation of Harvey Company
for the second year.
Number of units produced 25,000
Number of units sold 30,000
Units in beginning inventory 5,000
Unit sales price $ 30
Variable costs per unit:
Direct materials, direct labor
variable mfg. overhead $ 10
Selling & administrative
expenses $ 3
Fixed costs per year:
Manufacturing overhead $
Selling & administrative 150,000
expenses $
100,000
 Unit Cost Computations

Absorption Varia ble

Costing
Direct materials, direct labor, Costing
and variable mfg. overhead $ 10
Fixed mfg. overhead $
($150,000 ÷ 25,000 units) 6 10 -
Unit product cost $ 16 $ 10

SSn
Sincei ni ccthere
eethht ewas
erreeno wwchange
aass nnin oocthe
hchavariable
annggeeincosts
n
i
thht eper
evava rriaai btotal
unit, bleel cfixed
coosscosts, stst or the number of
units produced,
ppeerruunnthe unit
iit,t,to costs remain unchanged.t ee
totatall fiifxxeeddccoosstsst ,,oorrthh

nnuummbbeerr ooffuunnitstsi pprroodduucecedd,,thht ee

 Absorption Costing
Absorption Costing
Sales (30,000 × $30) $ 900,000
Less cost of goods sold:
Beg. inventory (5,000 × $16) $
80,000 Add COGM (25,000 × $16)
400,000
Goods available for sale
480,000
Less ending inventory - 480,000 Gross margin
420,000
Less selling & admin. exp.
Variable (30,000 × $3) $ 90,000
Fixed 100,000
190,000
TTincome
Net operating hheeseseaareretthhee $
230,000 2255,,000000 uunniittss
 Variable Costing
Variable
manufacturing
costs only. Variable Costing
Sales (30,000 × $30) $
Less variable expenses: 900,000
Beg. inventory (5,000 × $10) $ 50,000
Add COGM (25,000 × $10) 250,000 All fixed
Goods available for sale 300,000
manufacturing
Less ending inventory -
overhead is
Variable cost of goods sold 300,000
expensed.
Variable selling &
administrative
expenses (30,000 × $3) 90,000 390,000
Contribution margin 510,000
Less fixed expenses:
Manufacturing overhead $ 150,000
Selling & administrative expenses 100,000 250,000
Net operating income $ 260,000
 Comparing the Two Methods
We can reconcile the difference between
absorption and variable income as follows:

Variable costing net operating income $

Deduct: Fixed manufacturing overhead 260,000
costs released from inventory
(5,000 units × $6 per unit) 30,000
Absorption costing net operating income $
230,000

Fixed mfg. Overhead = $150,000 = $6.00 per unit

Units produced
25,000 units
 Income Comparison

Costing Method 1st Period 2nd Period Total

Absorption $ 120,000 $ $ 350,000
230,000
Variable 90,000 260,000 350,000
 Summary of Key Insights

Relation between Effect Relation between

production on variable and
and sales iniventory absorption income
Inventory Absorption
Production > Sales increases >
Variable
Inventory Absorption
Production < Sales decreases <
Variable
Absorption
Production = Sales No change =
Variable
End of Chapter 5