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15 Cards in this Set
- Front
- Back
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Absorption Costing |
the product costing method that assigns direct materials, direct labor, variable manufacturing overhead, and fixed manufacturing overhead to products. Required by GAAP for external reporting
first recorded as assets then transferred to COGS |
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Variable Costing |
The product costing method that assigns only variable manufacturing costs to products: direct materials, direct labor, and variable manufacturing overhead. Used for internal reporting and not GAAP |
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Business Segment |
identifiable part of the company for which financial information is available |
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Absorption costing formula |
Direct Materials +Direct Labor +Variable manufacturing overhead +Fixed manufacturing overhead =Total unit product cost |
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Variable Costing formula |
Direct Materials +Direct Labor +Variable Manufacturing overhead =Total unit product cost |
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Units produced equals units sold |
same for both |
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Units produced are more than units sold |
Different results. when more units are produced than sold, operating income is greater under absorption costing. Reason is bc absorption costing some manufactruing fixed costs are still in ending finished goods inventory on the balance sheet and have not been expensed
Abs costing income is higher |
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Units produced are less than units sold |
decrease in production increased the product cost per unit under absorption costing because the total fixed costs were distributed among fewer units
Abs costing income is lower |
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Absorption Costing Formula |
Sales Revenue -COGS =Gross Profit -Selling and Administrative Costs: Variable S&A Costs Fixed S&A Costs =Operating Income
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Variable Costing |
Sales Revenue -Variable Costs Variable Manufacturing Costs Variable S&A Costs Contribution Margin -Fixed Costs Fixed Manufacturing Costs Fixed S&A Costs =Operating Income |
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Which one has a higher manufacturing costs expense? |
Adsorption |
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Situations where absorption costing is more appropriate |
Setting Sales Prices for the long term Planning Production long term
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Situations where variable costing is more appropriate |
Setting Sales prices for the short term Planning production Short term Analyzing Profitability Analyzing contribution Margin |
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Contribution Margin |
Sales Revenue- Variable costs
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Contribution Ratio |
Contribution Margin/Sales Revenue
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