MANAGEMENT ACCOUNTING If production is greater than sales, absorption costing ne

Question

MANAGEMENT ACCOUNTING

If production is greater than sales, absorption costing net income will be greater than variable costing net income. Absorption costing net income is higher because some of the fixed manufacturing overhead costs will be deferred in the inventory account until the products are sold.

1. Explain how absorption costing is used to calculate the cost of goods manufactured. Please give example.

2. Explain how variable costing system costing is used to calculate the cost of goods manufactured. Please give example.

Can you list the resources used please. thank you

Explanation / Answer

(1) The absorption costing system is used to calculate the cost of goods manufactured because ot helps in estimation of direct cost which is reqired in formulating cost of manufacturing. The direct cost used in cost of manufacturing includes, cost of raw materials, overhead cost, utility cost, etc. The absorption cost helps to create an idea of the full expense done in a manufacturing process. The business requires absoprtion cost while planning stage whereby, investment to be made is decided for better flow of work.

The variable costing system is used to calculate the cost of goods manufactured because it does not include fixed cost in it. The production of the products depends directly upon variable costing. It is shown by the example that a product when does a single actiivty such as packaging incurs a cost which increases as the products doing the same activity increases which shows variable cost. These activites repeated for many countable products or uncountable products is shown by varibale costing system. It means that when total costing system does not include the fixed costing of the products then it shows the variale costing system.

http://strategiccfo.com/absorption-cost-accounting/

http://kfknowledgebank.kaplan.co.uk/KFKB/Wiki%20Pages/Marginal%20and%20absorption%20costing.aspx#Absorption_x0020_costing_0_1_0_2_0_0_0_0_0_0_0_0_0_0_0_0

http://strategiccfo.com/absorption-vs-variable-costing-advantages-and-disadvantages/

http://www.investinganswers.com/financial-dictionary/economics/variable-costs-804

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