© 2009 Pearson Prentice Hall. All rights reserved. Inventory Costing and Capacity Analysis

© 2009 Pearson Prentice Hall. All rights reserved. Learning Objectives Look Page 324

© 2009 Pearson Prentice Hall. All rights reserved. Definitions * variable-costing system. N. A system of assigning costs to products that includes only variable costs. The variable- costing system is useful for internal decision making, but is not allowed for tax or financial reporting purposes. One alternative to variable costing is absorption costing. * absorption costing. N. A system of assigning costs to products that includes all the costs it takes to manufacture the product, both fixed and variable. Absorption costing is the required system for financial reporting purposes. An alternative to absorption costing is variable costing, which is often used for internal decisions

© 2009 Pearson Prentice Hall. All rights reserved. Definitions * throughput costing. N. A method of assigning costs to products by treating only direct materials as an inventoriable cost. All other costs, such as direct labor, indirect costs, and overhead, are considered period costs, reducing income in the period in which they are incurred. The logic for throughput costing is that only direct materials are really variable costs. The cost of labor is relatively fixed for the period because of the difficulty of laying off and calling back several times to meet various production levels. The equipment cost is also nearly fixed, because the organization cannot buy and sell on short notice to meet production demands. Synonymous with supervariable costing.

© 2009 Pearson Prentice Hall. All rights reserved. Inventory Costing Choices: Overview Absorption Costing – product costs are capitalized; period costs are expensed Variable Costing – variable product and period costs are capitalized; fixed product and period costs are expensed Throughput Costing – only Direct Materials are capitalized; all other costs are expensed

© 2009 Pearson Prentice Hall. All rights reserved. Costing Comparison Variable costing is a method of inventory costing in which only variable manufacturing costs are included as inventoriable costs Absorption costing is a method of inventory costing in which all variable manufacturing costs and all fixed manufacturing costs are included as inventoriable costs See Page