Chapter 9 - Absorption cost systems. The main contents of the chapter consist of the following: job order costing; cost flows through the T-accounts ; allocating overhead to jobs; permanent versus temporary volume changes; plantwide versus multiple overhead rates; process costing: the extent of averaging; appendix A: process costing; appendix B: demand shifts, fixed costs, and pricing. | Absorption Cost Systems Chapter Nine Copyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Outline of Chapter 9 Absorption Cost Systems Job Order Costing Cost Flows through the T-Accounts Allocating Overhead to Jobs Permanent versus Temporary Volume Changes Plantwide versus Multiple Overhead Rates Process Costing: The Extent of Averaging Appendix A: Process Costing Appendix B: Demand Shifts, Fixed Costs, and Pricing 9- Connection to Other Chapters Chapter 9 describes how manufacturing firms use absorption costing to apply costs to products manufactured. Previously, chapters 7 and 8 introduced the topic of cost allocations and discussed various reasons why firms allocate costs, including decision management, decision control, cost-plus pricing contracts, financial reporting, and taxes. After chapter 9, chapters 10 and 11 will describe criticisms of absorption cost systems. Chapter 10 shows how variable costing can mitigate absorption costing’s incentives to overproduce. Chapter 11 shows how activity-based costing can mitigate absorption costing’s tendency to give inaccurate product costs. 9- Manufacturing versus Nonmanufacturing Settings Manufacturing settings Product costs: costs of manufacturing goods Period costs: nonmanufacturing costs Costs must be allocated between cost of goods sold (expense or expired costs) and ending inventories (assets or unexpired costs) Note: Because allocation involves management’s judgment, it offers discretion in product costing and income determination. Nonmanufacturing settings (merchandising and service firms) Product costs: costs of inventory held for resale Period costs: all other costs Most product costs for physical goods are directly traced to external contacts and do not require cost allocation 9- Two Types of Absorption Systems Absorption cost systems ensure that all manufacturing costs are assigned to products either by direct tracing or by cost allocation. Job order costing | Absorption Cost Systems Chapter Nine Copyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Outline of Chapter 9 Absorption Cost Systems Job Order Costing Cost Flows through the T-Accounts Allocating Overhead to Jobs Permanent versus Temporary Volume Changes Plantwide versus Multiple Overhead Rates Process Costing: The Extent of Averaging Appendix A: Process Costing Appendix B: Demand Shifts, Fixed Costs, and Pricing 9- Connection to Other Chapters Chapter 9 describes how manufacturing firms use absorption costing to apply costs to products manufactured. Previously, chapters 7 and 8 introduced the topic of cost allocations and discussed various reasons why firms allocate costs, including decision management, decision control, cost-plus pricing contracts, financial reporting, and taxes. After chapter 9, chapters 10 and 11 will describe criticisms of absorption cost systems. Chapter 10 shows how variable costing can mitigate absorption costing’s .
