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Inventory Costing Methods Explained

This document discusses different inventory costing methods: 1) Variable costing includes variable manufacturing costs as inventoriable and expenses fixed costs, while absorption costing includes both variable and fixed manufacturing costs as inventoriable. 2) The key difference between variable and absorption costing is how fixed manufacturing costs are treated - as an expense under variable costing and included in inventory under absorption costing. 3) Income statements differ under the two methods, with variable costing using a contribution format and absorption costing using a gross margin format.

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Taha Wael Qandeel
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72 views3 pages

Inventory Costing Methods Explained

This document discusses different inventory costing methods: 1) Variable costing includes variable manufacturing costs as inventoriable and expenses fixed costs, while absorption costing includes both variable and fixed manufacturing costs as inventoriable. 2) The key difference between variable and absorption costing is how fixed manufacturing costs are treated - as an expense under variable costing and included in inventory under absorption costing. 3) Income statements differ under the two methods, with variable costing using a contribution format and absorption costing using a gross margin format.

Uploaded by

Taha Wael Qandeel
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Taha Wael Qandeel Cost Accounting II

Chapter 3

Inventory Costing

 The inventory costing system that is chosen determines which manufacturing costs are
treated as inventoriable costs
Inventory
Costing

Absorption Variable Throughput


Costing Costing Costing

Variable costing is a method of inventory costing in which all variable manufacturing


costs (direct and indirect) are included as inventoriable costs. variable costing is a less-
than-perfect term describe this inventory-costing method, because only variable
manufacturing costs are inventoried; variable nonmanufacturing costs are still treated
as period costs and are expensed.
Absorption costing is a method of inventory costing in which all variable manufacturing
costs and all fixed manufacturing costs are included as inventoriable costs.
Difference between Variable and Absorption:
• Variable costing and absorption costing differ in only one respect: how to account for fixed
manufacturing costs. Under variable costing, fixed manufacturing costs are excluded from
inventoriable costs and are a cost of the period in which they are incurred. Under absorption
costing, fixed manufacturing costs are inventoriable and become a part of cost of goods sold in
the period when sales occur.

How does income differ under Variable and Absorption?


• The variable-costing income statement is based on the contribution-margin format. Under it,
operating income is driven by the unit level of sales. Under absorption costing, the income
statement follows the gross-margin format. Operating income is driven by the unit level of
production, the unit level of sales, and the denominator level used for assigning fixed costs.

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Taha Wael Qandeel Cost Accounting II

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Taha Wael Qandeel Cost Accounting II

Throughput costing
Throughput costing, which also is called super-variable costing, is an extreme form of variable
costing in which only direct material costs are included as inventoriable costs.
All other costs are costs of the period in which they are incurred

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