MPA 602: Cost and

Managerial Accounting
Materials
Introduction
• Inventory in a company includes stock of raw
materials, work-in-progress, finished & semi-
finished products, spare components and by-
products,etc
• Inventory control is an important feature of cost
accounting system
Material control procedures
Purchase

Receipt

Storage Stocktaking

Issue
Material control procedures
• Establishing optimal stock levels is of vital importance of in controlling
of stock
• Once the optimal stock levels are established, the store department is
responsible for ensuring that optimal stock levels are maintained for
each item of materials in stock. Normally, a bin card is used to record
the quantity of materials in stock for each item

• A document that records the status of a good held in a stock room.

A typical retailing business with a large stock room will use a bin
card to record a running balance of stock on hand, in addition to
information about stock received and notes about problems
associated with that stock item.
• When items of materials have reached their re-order point, the
storekeeper will make out a purchase requisition requesting the
purchasing department to contact with appropriate supplier
• When the purchasing department receives the purchase requisition,
the purchasing officer will examine the different sources of supply for
the purpose of securing the highest quality materials at the lowest
price

• The reorder point (ROP) is the level of inventory which triggers an action to

replenish that particular inventory stock. It is a minimum amount of an item
which a firm holds in stock, such that, when stock falls to this amount, the
item must be reordered.
• On the receipt of the goods, the stores department
will inspect and compare the supply with the
purchase order
• When the production department receives a
production order, it will give a materials requisition to
the storekeeper. On the receipt of requisition, the
storekeeper checks for correctness and authorization.
If satisfactory, the issue will be made and entered the
details in bin cards. He then forwards the store
requisition to accounts department
• When the accounts department receives the stores
requisition, it will price each of the items listed on it by
appropriate pricing methods (e.g FIFO etc). Then, the
amount of materials issued is charged to appropriate job or
overhead account and the stock values are reduced
Costs of Acquiring Materials

• A guiding principles in accounting for the cost of

materials is that all costs incurred in entering a unit of
materials into factory production should be included. So
acquisition costs includes invoice price, transportation
charges, receiving, inspecting, insuring, storing and
general and cost accounting charges.
Pricing of the issues of material
• Pricing of materials may change from time to time.
• Materials are usually acquired by several deliveries at
different prices
• Actual costs can then take on several different values
• Therefore, the materials pricing system adopted
should be the simplest and the most effective one
Methods of stock valuation

• First-in-first-out(FIFO)
• Last-in-first-out(LIFO)
• Weight average cost (WAVCO)
• Specific identification/unit cost method
First-in-first-out
• This method assumes that the first stock to be
received is the first to be sold
• The cost of materials used is based on the oldest
prices
• The closing stock is valued at the most recent prices
Last-in-first-out (LIFO)

• This method assumes that the last stock to be

received is the first to be sold

• Therefore, the cost of materials used is based on the

most recent prices

• The closing stock is valued at the oldest prices

Weight average cost (WAVCO)

• This method assumes that the cost of materials used

and closing stock are valued at the weighted average
cost
Specific identification/unit cost method

• This method assumes that each item of the stock has

its won identity

• The costs of materials used and closing stock are

determined by associating the units of stock with their
specific unit cost
Stock control level
• The stores should control its stock at an appropriate
level so as to minimize the costs related to stock

• These cost can be classified into three categories:

• Costs of obtaining stock
• Carrying cost
• Stock-out-stock
Cost of obtaining stock/ordering cost

• Purchase costs of goods acquired

• Carriage inwards

• Administrative costs of purchasing and accounts

department
Stock-out cost
• Loss of sale revenue due to the stop in production

• Reduction in future sales because of the loss of

goodwill

• Higher costs for urgent and small order of materials

Cost of storage (carrying cost)
• Storage and handling cost

• Interest on capital tied up by the stock

• Insurance and security

• Stock loss due to deterioration, obsolescence and pilferage

• Audit, stocktaking and stock recording cost

Economic Order Quantity
(EOQ)
EOQ

• EOQ is the size of the order which contributes towards

maintaining the stocks of material at the optimal level
and at a minimum cost
The formula
EOQ = 2xOCxQ
CUxCC

Where EOQ = Economic Order Quantity

OC= order cost per order
Q = Annual quantity required in units
CC =Carrying cost per unit per annum
CU= Cost per unit of item
Example
• The annual consumption of a part “X” is 5000 units. The
procurement cost per order is Tk.10 and the cost per unit is
Tk.0.5. The storage and carrying cost is 10% of the material
unit cost.

Required:

Calculate the EOQ

Solution
• OC= Tk.10 Q= Tk.5000, CU= Tk.0.5, CC=10%

EOQ = 2xOCxQ
CUxCC

EOQ = 2 * 5000 *10

0.5*10%
= 1414 units
Cost Tk.

120

Total cost
Minimum cost
80
Carrying cost

40 Ordering cost

EOQ=1414 units Unit per order

400 1200 2000

• The graph shows the line representing ordering cost
sloping downward, indicating lower cost when a large
quantity is purchased and the line representing cost of
carrying stock going upward, indicating a higher cost
for a large quantity
Level setting
Level setting

• It is to determine the correct or most optimal stock

level so as to avoid overstocking or understocking of
materials
• These levels are known as the Maximum, Minimum
and Re-order levels
Re-order level

• The level of stock of material at which a new order for

the material should be placed

• The formula:

Re-order level
= (Maximum usage * Maximum lead time )
Re-order quantity
• Reorder quantity is the size of each order
• The formula:

Reorder quantity = Maximum stock –(Reorder level –

Minimum usage in minimum lead time)
Maximum level
• The maximum stock level is highest level of stock planned to be
held
• Any amount above the maximum level will be considered as
excessive stock
• The formula:

Maximum level
= re-order level + Re-order quantity(EOQ) –Minimum
anticipated usage in Minimum lead
Minimum level/Safety stock
• The minimum level is that level of stock that provides a safety
buffer in the event of increased demand or reduced receipt of
stock caused by the lengthening of lead time
• The stock level should not be allowed to fall below the safety
stock
• The formula:

Minimum level=
Re-order level – Average usage in average lead time
Units

Maximum level
1500

Reorder level
1000

Minimum level
500

Weeks
Example
Average usage 100 units per week
Minimum usage 70 units per week
Maximum usage 140 units per week
Lead time (the time 3-5 weeks
between ordering and
replenishment of goods)
Ordering cost per order Tk.180
Annual cost of carrying a Tk.5.2
unit in stock
• Calculate:
• Economic Order Quantity (EOQ)
• Reorder level
• Reorder quantity
• Minimum level
• Maximum level
• Economic Order Quantity (EOQ)

EOQ = 2xOCxQ
C

EOQ = 2 * Tk.180 *5200

5.2
= 600 units
• Reorder level

Re-order level
= (Maximum consumption * Maximum re-order period )
= 140 units *5
= 700 units
• Minimum level

Minimum level
= Re-order level – Average usage in average lead time
= 700 units – (100 units *4)
= 300 units
• Maximum level

Maximum level
= re-order level + EOQ –Minimum anticipated usage
in Minimum lead
= 700 units +600 units – (70 units *3)
= 1090 units
• Reorder quantity

Reorder quantity = Maximum stock –(Reorder level –

Minimum usage in minimum lead
time)
= 1090 units – (700 units – 70 units *3)

= 600 units
IAS 2 - INVENTORIES
Objective and Scope
OBJECTIVE:

The objective of this Standard is to prescribe the accounting treatment

for inventories.

SCOPE:
Applies to all inventories, expect:
a) Work in progress arising under construction contracts, including directly
related service contracts (see IAS 11 Construction Contracts)
b) Financial instruments (see IAS 39 Financial Instruments)
c) Biological assets related to agricultural activity and agricultural produce at
the point of harvest (see IAS 41 Agriculture)
 Definitions
Inventories

a)Held for sale in the ordinary course of business;

b)In the process of production for such sale;
c)In the form of materials or supplies to be consumed in the
production process or in the rendering of services.
 Definitions
Net Realizable Value / Fair Value

• Net Realizable Value: is the estimated selling price in the ordinary

course of business less the estimated cost of completion and the
estimated costs necessary to make the sale.

• Fair Value: is the amount for which an asset could be exchanged, or a

liability settled, between knowledgeable, willing parties in an arm’s
length transaction.
 Cost and Valuation

• Inventories shall be measured at the lower of cost and net

realisable value

• The cost of inventories shall comprise all costs of purchase,

cost of conversion and other costs incurred in bringing the
inventories to their present location and condition.
 Cost of Purchase
Cost of Purchase

The cost of purchase of inventories comprise the purchase

price, import duties and other taxes, transport, handling and
other costs directly attributable to the acquisition of finished
goods, materials and services.

Trade discounts, rebates and other similar items are deducted

in determining the cost of purchase.
 Costs of Conversion
The costs of conversion of inventories include costs directly
related to the units of production, such as direct labour. They
also include a systematic allocation of fixed and variable
production averheads that are incurred in converting materials
into finished goods.

The allocation of fixed production overheads to the costs of

conversion is based on the normal capacity of the production
facilities. The amount of fixed overhead allocated to each unit of
production is not increased as a consequence of low production
or idle plant.
Costs items excluded from cost of inventories

a) Abnormal amounts of wasted materials, labor or other

production costs

b) Storage costs, unless those costs are necessary in the

production process before a further production stage

c) Administrative overheads

d) Selling costs
IAS 2
Revised
Differences:

• IAS 2 does not permit exchange differences arising directly on the recent
acquisition of inventories invoiced in a foreign currency to be included in
the costs of purchase of inventories.

• Paragraph 18 was inserted to clarify that when inventories are purchased

with deferred settlement terms, the difference between the purchase price
for normal credit terms and the amount paid is recognized as interest
expense over the period of financing.

• The Standard does not permit the use of the last-in, first-out (LIFO)
formula to measure the cost of inventories.
 Cost Formulas

• Goods or services produced and segregated for specific projects shall

be assigned by using specific identification of their individual costs
• The First-in, First out (FIFO)
• Weighted average cost formula

• An entity shall use the same cost formula for all inventories having a
similar nature and use to the entity.
For inventories with a different nature or use, different cost formulas
may be justified.
Net Realisable Value

Estimated Selling Price X

Discounts (X)
Estimated cost of completion (X)
Selling Costs (X)
---
Net Realizable Value X
Provision for inventory impairment

• The cost of inventories may not be recoverable if those inventories

are damaged, if they have become wholly or partially obsolete, or if
their selling prices have declined. The cost of inventories may also
not be recoverable if the estimated costs of completion or the
estimated costs to be incurred to make the sale have increased.
The practice of writing inventories down below cost to net realisable
value is consistent with the view that assets should not be carried in
excess of amounts expected to be realized from their sale or use.

• Materials and other supplies held for use in the production of

inventories are not written down below cost if the finished products
in which they will be incorporated are expected to be sold at or
above cost.
Recognition as an Expense
• When inventories are sold, the carrying amount of those
inventories shall be recognized as an expense in the period in
which the related revenue is recognized.
• The amount of any write-down of inventories to net realisable
value and all losses of inventories shall be recognized as an
expense in the period the write-down or loss.
• The amount of any reversal of any write-down of inventories,
arising from an increase in net realisable value, shall be
recognized as a reduction in the amount of inventories
recognized as an expense in the period in which the reversal
occurs.
Disclosure
• The accounting policies adopted in measuring inventories, including the cost of
formula used,
• The total carrying amount of inventories and the carrying amount in classifications
appropriate to the entity,
• the carrying amount of inventories carried at fair value less costs to sell,
• the amount of inventories recognized as an expense during the period,
• the amount of any write-down of inventories recognized as an expense in the
period,
• the amount of any reversal of any write-down that is recognized as a reduction, in
the amount of inventories recognized as expense,
• the circumstances or events that led to the reversal of a write-down of
inventories,
• the carrying amount of inventories pledged as security for liabilities.
 Variable costing

• Is a method of inventory costing in which all variable

manufacturing costs are included as inventoriable
costs. All fixed manufacturing costs are treated as
costs of the period in which they are incurred.
Absorption Costing

• Is a method of inventory costing in which all variable

manufacturing costs and all fixed manufacturing costs are
included as inventoriable costs i.e. inventory absorbs all
manufacturing costs.
• So difference is in terms of:
• “Whether fixed manufacturing costs (both direct and
indirect) are inventoriable costs”
• Inventoriable costs associated with the acquisition
and conversion of materials and all others
manufacturing inputs into goods for sale, these
costs are first recorded as an assets and then
subsequently become an expense when the goods
are sold
 Costs flows under Variable Costing
• Costs to account for Inventoried costs Expenses on Income
on Balance Sheet Statement

Become
Direct material Expenses when
Direct labour Initially applied
The inventory
Variable manufacturing To inventory
Is sold
overhead As product costs

Fixed manufacturing Become expenses

overhead immediately
 Costs flows under Absorption Costing
• Costs to account for Inventoried costs Expense on
on Balance Sheet Income Statement

Direct material Initially Become

Direct labour Applied to Expenses
Variable manufacturing Inventory as When the
Overhead Product Inventory is
Fixed manufacturing costs sold
Overhead
Comparison of Variable and
Absorption Costing Methods (cont.)

LO-1
Production, Sales, and Income Relationships

• The relationship between variable-costing income and

absorption-costing income changes as the relationship
between production and sales changes.
Production, Sales, and Income Relationships
(cont.)
 Illustration

• GC company makes plastic ring for large plastic molding machine.

In 2016 and 2017, the company had the following standard costs
for production of rings:
• DM 1.3
• DL 1.5
• VMO/H 0.2
2016 2017
Op inventory - 30000
Production 170000 140000
Sales 140000 160000
Cl. Inventory 30000 10000
• Fixed manufacturing O/H is budgeted at Tk.150000. Expected
production in each year is 150000 rings and the sales price is
Tk.5 per ring. Both budgeted and actual selling and admin.
Expenses are Tk.65000 yearly fixed plus sales commission at
5% of sales amount.
Absorption and Variable Costing
Mellon Co. 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:
Mfg. overhead $ 150,000
Selling & administrative
expenses $ 100,000

8-66
Absorption and Variable Costing
Unit product cost is determined as follows:

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

Selling and administrative expenses are always treated as period expenses and
deducted from revenue.

8-67
Absorption Costing
Income Statements
Mellon Co. had no beginning inventory, produced 25,000
units and sold 20,000 units this year at $30 each.
Absorption Costing
Sales (20,000 × $30) $ 600,000
Less cost of goods sold:
Beginning inventory
Add COGM
Goods available for sale
Ending inventory
Gross margin
Less selling & admin. exp.
Variable
Fixed
Net income

8-68
Absorption Costing
Income Statements
Mellon Co. had no beginning inventory, produced 25,000
units and sold 20,000 units this year at $30 each.
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
Fixed
Net income

8-69
Absorption Costing
Income Statements
Mellon Co. had no beginning inventory, produced 25,000
units and sold 20,000 units this year at $30 each.

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 income $ 120,000

8-70
Variable Costing
Income Statements
Now let’s look at variable costing by Mellon Co.

Variable Costing
Sales (20,000 × $30) $ 600,000
Less variable expenses:
Beginning inventory $ -
Add COGM
Goods available for sale
Ending inventory
Variable cost of goods sold
Variable selling & administrative
expenses
Contribution margin
Less fixed expenses:
Manufacturing overhead
Selling & administrative expenses
Net income
8-71
Variable Costing
Income Statements
Now let’s look at variable costing by Mellon Co.
We exclude the
Variable
fixed Costing
manufacturing
Sales (20,000 × $30) $ 600,000
Less variable expenses: overhead.
Beginning inventory $ -
Add COGM (25,000 × $10) 250,000
Goods available for sale $ 250,000
Ending inventory (5,000 × $10) 50,000
Variable cost of goods sold $ 200,000
Variable selling & administrative
expenses
Contribution margin
Less fixed expenses:
Manufacturing overhead
Selling & administrative expenses
Net income
8-72
Variable Costing
Income Statements
Now let’s look at variable costing by Mellon Co.

Variable Costing
Sales (20,000 × $30) $ 600,000
Less variable expenses:
Beginning inventory $ -
Add COGM (25,000 × $10) 250,000
Goods available for sale $ 250,000
Ending inventory (5,000 × $10) 50,000
Variable cost of goods sold $ 200,000
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 income $ 90,000
8-73
Comparing Absorption and
Variable Costing
Let’s compare the methods.
Cost of
Goods Ending Period
Sold Inventory Expense Total
Absorption costing
Variable mfg. costs $ 200,000
Fixed mfg. costs 120,000
$ 320,000

Variable costing
Variable mfg. costs $ 200,000
Fixed mfg. costs -
$ 200,000

8-74
Comparing Absorption and
Variable Costing
Let’s compare the methods.
Cost of
Goods Ending Period
Sold Inventory Expense Total
Absorption costing
Variable mfg. costs $ 200,000 $ 50,000 $ -
Fixed mfg. costs 120,000 30,000 -
$ 320,000 $ 80,000 $ -

Variable costing
Variable mfg. costs $ 200,000 $ 50,000 $ -
Fixed mfg. costs - - 150,000
$ 200,000 $ 50,000 $ 150,000

8-75
Comparing Absorption and
Variable Costing
Let’s compare the methods.
Cost of
Goods Ending Period
Sold Inventory Expense Total
Absorption costing
Variable mfg. costs $ 200,000 $ 50,000 $ - $ 250,000
Fixed mfg. costs 120,000 30,000 - 150,000
$ 320,000 $ 80,000 $ - $ 400,000

Variable costing
Variable mfg. costs $ 200,000 $ 50,000 $ - $ 250,000
Fixed mfg. costs - - 150,000 150,000
$ 200,000 $ 50,000 $ 150,000 $ 400,000

8-76
Reconciling Income Under Absorption
and Variable Costing
We can reconcile the difference between absorption and
variable net income as follows:

Variable costing net income $ 90,000

Add: Fixed mfg. overhead costs
deferred in inventory
(5,000 units × $6 per unit) 30,000
Absorption costing net income $ 120,000

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

Units produced 25,000
8-77
Year 2

In its second year of operations, Mellon Co. started with an

inventory of 5,000 units, produced 25,000 units and sold
30,000 units at $30 each.
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:
Mfg. overhead $ 150,000
Selling & administrative
expenses $ 100,000
8-78
 Unit product cost is determined as follows:

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

There has been no

change in Mellon’s
cost structure.
8-79
Year 2
Units in ending inventory from the previous period.
Absorption Costing
Sales (30,000 × $30) $ 900,000
Less cost of goods sold:
Beg. inventory (5,000 x $16) $ 80,000
Add COGM (25,000 × $16) 400,000
Goods available for sale $ 480,000
Ending inventory - 480,000
Gross margin $ 420,000
Less selling & admin. exp.
Variable (30,000 × $3) $ 90,000
Fixed 100,000 190,000
Net income $ 230,000

8-80
 Absorption Costing
Sales (30,000 × $30) $ 900,000
Less cost of goods sold:
Beg. inventory (5,000 x $16) $ 80,000
Add COGM (25,000 × $16) 400,000
Goods available for sale $ 480,000
Ending inventory - 480,000
Gross margin $ 420,000
Less selling & admin. exp.
Variable (30,000 × $3) $ 90,000
Fixed 100,000 190,000
Net income $ 230,000

25,000 units produced in the current period.

8-81
Year 2
Variable Costing
Sales (30,000 × $30) $ 900,000
Less variable expenses:
Beg. inventory (5,000 × $10) $ 50,000
Add COGM (25,000 × $10) 250,000
Goods available for sale $ 300,000
Ending inventory -
Variable cost of goods sold $ 300,000
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 income $ 260,000

Excludes fixed manufacturing overhead.

8-82
Summary

Income Comparison

Costing Method 1st Period 2nd Period Total

Absorption $ 120,000 $ 230,000 $ 350,000
Variable 90,000 260,000 350,000

In the first period, production (25,000 units)

was greater than sales (20,000).

In the second period, production (25,000 units)

was less than sales (30,000).

8-83
Summary

Income Comparison

Costing Method 1st Period 2nd Period Total

Absorption $ 120,000 $ 230,000 $ 350,000
Variable 90,000 260,000 350,000

For the two-year period, total absorption

income and total variable income are the same.

8-84
 Summary Comparison of Absorption
(AC) and Variable Costing (VC)
Total
Production versus Inventory
Sales Effect Period Expense Effect Profit Effect

Fixed mfg. Fixed mfg.

Produced > Sold Increase costs expensed < costs expensed AC > VC
AC VC

This was the case in the firstFixed mfg.when production

period Fixed mfg. of 25,000
Produced < Sold Decrease costs expensed > costs expensed AC < VC
units was greater than sales of AC20,000 units. VC

Inventory increased Fixed

frommfg. Fixedunits
zero to 5,000 mfg. and
Produced = Sold No change costs expensed = costs expensed AC = VC
$120,000 absorption incomeAC was greaterVC than
$90,000 variable income. 8-85
 Summary Comparison of Absorption
(AC) and Variable Costing (VC)

Total
Production versus Inventory
Sales Effect Period Expense Effect Profit Effect

Fixed mfg. Fixed mfg.

Produced > Sold Increase costs expensed < costs expensed AC > VC
AC VC

Fixed mfg. Fixed mfg.

Produced < Sold Decrease costs expensed > costs expensed AC < VC
AC VC

Fixed mfg.
In the second period sales of 30,000 units Fixed mfg.
Produced were
= Sold Nothan
greater change costs
production expensed = costs expensed
of 25,000. AC = VC
AC VC
8-86
 Summary Comparison of Absorption
(AC) and Variable Costing (VC)
Total
Production versus Inventory
Sales Effect Period Expense Effect Profit Effect

Fixed mfg. Fixed mfg.

Produced > Sold Increase costs expensed < costs expensed AC > VC
AC VC

Fixed mfg. Fixed mfg.

Produced < Sold Decrease costs expensed > costs expensed AC < VC
AC VC

Inventory decreased from 5,000 unitsmfg.

Fixed to zero, Fixed mfg.
Producedand
= $230,000
Sold No absorption
change income
costswas less
expensed = costs expensed AC = VC
than $260,000 variable income. AC VC
8-87
 Summary Comparison of Absorption
(AC) and Variable Costing (VC)
Total
Production versus Inventory
Sales Effect Period Expense Effect Profit Effect

Fixed mfg. Fixed mfg.

Produced > Sold Increase costs expensed < costs expensed AC > VC
AC VC

Fixed mfg. Fixed mfg.

Produced < Sold Decrease costs expensed > costs expensed AC < VC
AC VC

Fixed mfg. Fixed mfg.

Produced = Sold No change costs expensed = costs expensed AC = VC
AC VC
8-88
Evaluation of Variable Costing

Management finds it Consistent with

easy to understand. CVP analysis.

Emphasizes contribution in
Advantages
short-run pricing decisions.

Impact of fixed Profit for period not

costs on profits affected by changes
emphasized. in fixed mfg. overhead.
8-89
Evaluation of Absorption Costing

Fixed manufacturing overhead is

treated the same as the other product
costs, direct material and direct labor.

Consistent with long-run

Advantages
pricing decisions that must
cover full cost.

External reporting
and income tax law
require absorption costing.
8-90
Throughput Costing

Example

In an automated process direct material may be

the only unit-level cost and so is the only product cost.

All other manufacturing costs are expensed as period costs.

Incentive to Average unit cost does

overproduce not vary with changes
is reduced in production levels.

Advantages

8-91