After completing this chapter, you should be able to: Explain what is meant by the word cost; distinguish among product costs, period costs, and expenses; describe the role of costs in published financial statements. | Lecture 26: Inventory Costing and capacity analysis Inventory Costing Choices: Overview Absorption Costing – product costs are capitalized; period costs are expensed Variable Costing – variable product and period costs are capitalized; fixed product and period costs are expensed Throughput Costing – only Direct Materials are capitalized; all other costs are expensed 2 2 Costing Comparison Variable costing is a method of inventory costing in which only variable manufacturing costs are included as inventoriable costs Absorption costing is a method of inventory costing in which all variable manufacturing costs and all fixed manufacturing costs are included as inventoriable costs 3 3 Differences in Income Operating Income will differ between Absorption and Variable Costing The amount of the difference represents the amount of Fixed Product Costs capitalized as Inventory under Absorption costing, and expensed as a period costs under Variable Costing 4 4 Comparative Income Statements 5 5 Comparative Income Statements – Three Years 6 6 Comparative Income Effects Variable Costing Absorption Costing Are fixed product costs inventoried? No Yes Is there a production-volume-variance? No Yes Are classifications between variable & fixed costs routinely made? Yes Infrequently 7 7 Comparative Income Effects Variable Costing Absorption Costing How do changes in unit inventory cost affect operating income if ? Production = Sales Equal Equal Production > Sales Lower Higher Production < Sales Higher Lower 8 8 Comparative Income Effects Variable Costing Absorption Costing What are the effects on cost-volume-profit (for a given level of fixed costs and a given contribution margin per unit? Driven by: unit level of sales Driven by: Unit level of sales Unit level of production Chosen denominator level 9 9 Comparison of Alternative Inventory Costing Systems Variable Direct Manufacturing Cost Actual Costing Normal Costing Standard Costing Actual Prices X Actual Quantity of inputs used . | Lecture 26: Inventory Costing and capacity analysis Inventory Costing Choices: Overview Absorption Costing – product costs are capitalized; period costs are expensed Variable Costing – variable product and period costs are capitalized; fixed product and period costs are expensed Throughput Costing – only Direct Materials are capitalized; all other costs are expensed 2 2 Costing Comparison Variable costing is a method of inventory costing in which only variable manufacturing costs are included as inventoriable costs Absorption costing is a method of inventory costing in which all variable manufacturing costs and all fixed manufacturing costs are included as inventoriable costs 3 3 Differences in Income Operating Income will differ between Absorption and Variable Costing The amount of the difference represents the amount of Fixed Product Costs capitalized as Inventory under Absorption costing, and expensed as a period costs under Variable Costing 4 4 Comparative Income Statements 5 5 .
