6-4 What arguments in favor of treating fixed manufacturing overhead costs as pr

Question

6-4 What arguments in favor of treating fixed manufacturing overhead costs as product costs?

6-6 If the units produced and unit sales are equal, which method would you expet to show the higer operating income, variable costing or absorption costing? Why?

6-7 If the units produced exceed unit sales, which method would you expect to show the higher net operating income, variable costing or absorptioncosting? Why?

6-8 If fixed manufacturing overhead costs are relaesed from inventory under absorption costing, what does this tell you about the level of production in relation to the level of sales?

6-9 Under absorption costing, how is it possible to increase net operating income without increasing sales?

Explanation / Answer

6.4 Arguments in favor of treating fixed manufacturing overhead costs as product costs:

- Fixed manufacturing costs are not really the cost of any particular unit of product. If a unit is made or not, the total fixed manufacturing costs will remain constant. Therefore, how can one say that these costs are part of the costs of the products? These costs are incurred to have the capacity to make products during a particular period and should be charged against that period as period costs according to the marketing principle.

All manufacturing costs must be assigned to products to properly state the full cost of costing a product.

6-6 If the units produced and unit sales are equal,

If unit produced and unit sales are equal, net operating should be the same under both absorption and variable costing. When production equals sales, inventories do not increase or decrease and therefore under absorption costing fixed manufacturing overhead cost is not deferred in inventory or released from inventory.

6.7 If the units produced exceed unit sales,

Under this circumstance Absorption costing will usually show higher net operating income than variable costing. Because when production exceeds sales, inventories increase and under absorption costing part of the fixed manufacturing overhead cost of the current period is deferred in inventory to future periods Less expenses are recorded. In contrast, all of the fixed manufacturing overhead cost of the current period is immediately expensed under variable costing.

6.8 If fixed manufacturing overhead costs are released from inventory under absorption costing

If fixed manufacturing overhead cost is released from inventory, then inventory levels must have decreased and therefore production must have been less than sales.

6-9 Under absorption costing,to increase net operating income without increasing sales:

Net operating income can be increased by increasing the level of production without any increase in sales. If production exceeds sales, units of product are added to inventory. These units carry a portion of the current period's fixed manufacturing overhead costs into the inventory account, reducing the current period's reported expenses and causing operating income to increase.

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