absorption and variable costing

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6 Terms

1
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2 approaches for valuing inventory and cost of goods sold

  1. absorption costing

  2. variable costing


2
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fixed overhead

  • absorption costing - fixed overhead is a product cost

  • variable costing - fixed overhead is a period cost

    • all other costs are treated in an identical manner under both methods


3
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absorption costing

  • required by GAAP for external financial reporting (income statements & balance sheets)

  • according to the Tax Reform Act of 1986, must be used when filing income tax reports

  • uses a traditional income statement format (sales - cogs = GP - S&A expenses = net income


4
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variable costing

  • preferred by managers for decision making

  • consistent with cost-volume-profit analysis because all costs on the income statement are either variable or fixed

  • uses a contribution income statement format (sales - variable costs = CM - fixed costs = net income0


5
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LIFO (last in, first out)

  • assigns the newest inventory costs to cost of goods sold

  • assigns the oldest inventory costs to ending inventory


6
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FIFO (first in, first out)

  • assigns the oldest inventory costs to cost of goods sold

  • assigns the newest inventory cost to ending inventory