M6 Outline

University of Maryland, Baltimore County **We aren't endorsed by this school
ECON 122
Oct 26, 2023
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M6: Variable Costing 1. How Does Variable Costing Differ from Absorption Costing? a. Absorption Costing - COGS absorbs all of the manufacturing costs (DM/DL/VMOH/FMOH) i. We sort costs as being product (DM/DL/MOH) vs. period costs (SG&A) b. Variable Costing - COGS only absorbs variable manufacturing costs (DM/DL/VMOH) - FMOH becomes a period cost rather than a product cost i. We sort costs as being variable (DM/DL/VMOH/VSG&A) vs. fixed (FMOH/FSG&A)
c. Comparison of Unit Product Costs - the only difference is simply where FMOH falls 2. How Does Operating Income Differ Between Variable Costing and Absorption Costing? a. Units Produced Equal Units Sold - there is no difference
b. Units Produces Are More Than Units Sold - Absorption Cost < Variable Cost therefore, Absorption Income > Variable Income i. FMOH is applied at a rate per unit sold under absorption costing FMOH rate = Total FMOH Units Produced FMOH applied = FMOH rate/unit * units sold ii. If we sell less than what is produced, we are only applying a fraction of the FMOH
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