Chapter 7, Problem 1DQ

What types of costs are customarily included in the cost of manufactured products under (A) the absorption costing concept and (B) the variable costing concept?

To determine

State the concepts of Absorption costing related to manufacturing products.

Explanation of Solution

Absorption Costing

Absorption costing is compulsory under Generally Accepted Accounting Principles (GAAP) for financial statements circulated to the external users. Under absorption costing, the cost of goods manufactured includes direct materials, direct labor, and factory overhead costs. Fixed factory overhead and variable factory overhead included as a part of factory overhead.

Variable Costing

Managers frequently use variable costing for internal purposes for taking decision making. The cost of goods manufactured includes direct materials, direct labor, and variable factory overhead. Fixed factory overhead considered as period (fixed) expense.

State the concepts of Absorption costing related to manufacturing products as follows:

In variable and fixed manufacturing costs are included as a part of the product manufactured under absorption costing.

To determine

State the concepts of variable costing related to manufacturing products.

Explanation of Solution

In variable manufacturing costs are included as a part of the costs of the product manufactured. Fixed manufacturing costs are considered as an expense of the period (Fixed) in which they are incurred under variable costing.