![]() Question: Although absorption costing is used for external reporting, managers often prefer to use an alternative costing approach for internal reporting purposes called variable costing. (The term full costing is also used to describe absorption costing.) because all manufacturing overhead costs (fixed and variable) are absorbed into inventory until the goods are sold. ![]() This method of accounting is called absorption costing A costing method that includes all manufacturing costs (fixed and variable) in inventory until the goods are sold. ![]() These costs are attached to inventory as an asset on the balance sheet until the goods are sold, at which point the costs are transferred to cost of goods sold on the income statement as an expense. All costs associated with production are treated as product costs, including direct materials, direct labor, and fixed and variable manufacturing overhead. GAAP, all nonmanufacturing costs (selling and administrative costs) are treated as period costs because they are expensed on the income statement in the period in which they are incurred. Generally Accepted Accounting Principles (U.S. In Chapter 2 "How Is Job Costing Used to Track Production Costs?", we discussed how to report manufacturing costs and nonmanufacturing costs following U.S.
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