Question
In: Accounting
What is the theoretical justification for excluding fixed manufacturing costs from inventories in marginal costing?
What is the theoretical justification for excluding fixed manufacturing costs from inventories in marginal costing?
Solutions
Expert Solution
MARGINAL COSTING: Is is a method of costing which differentiates the Variable costs (which are the costs that vary with the level of output produced and are dependent on them) and Fixed Costs (the costs that stay fixed in amount and do not change with a change in the level of output). In this method, the calculation is done as follows;
Sales
Less: Variable Costs
Contribution
Less: Fixed Costs
Profit
JUSTIFICATION FOR EXCLUDING FIXED MANUFACTURING COSTS FROM INVENTORIES IN MARGINAL COSTING
- Unlike Variable costs, that change (that is, increase or decrease) with a synonymous change in the level of output, fixed costs do not vary on the basis of the level of production.
- Fixed costs are therefore, Period costs as they are incurred for a particular period and are not dependent on the level of output produced.
- Marginal Costing has a basic feature to differentiate costs on the basis of being 'Variable' or 'Fixed'. Thus, Fixed costs, even the ones related to manufacturing are excluded from inventories because of the fact, that they do not change as per the level of output and have to be incurred i.e. they are fixed and are periodic costs.
ekkarill92 answered 1 year agoRelated Solutions
What is the rationale for excluding fixed manufacturing costs from inventoriable costs in costing systems such...
What is the rationale for excluding fixed manufacturing costs
from inventoriable costs in costing systems such as variable
costing and throughput costing? (Why do companies choose to treat
Fixed Manufacturing Cost as period expense?)
Marginal costing is a technique that distinguishes between variable costs and fixed costs. In this approach...
Marginal costing is a technique that distinguishes between
variable costs and fixed costs. In this approach to costing, only
the variable costs of production are charged to cost units.
Marginal costing and the concept of contribution are fundamental to
the breakeven analysis or ‘cost-volume-profit’ (CVP) technique.
Required:
(a) Explain the concept of contribution and its importance to the
CVP technique.
(b) Describe the nature of each of the ‘dropping a product or
service’ and ‘special contract’ decisions for which the...
Variable Costing—Production Exceeds Sales Fixed manufacturing costs are $37 per unit, and variable manufacturing costs are...
Variable Costing—Production Exceeds Sales
Fixed manufacturing costs are $37 per unit, and variable
manufacturing costs are $111 per unit. Production was 91,000 units,
while sales were 86,450 units.
a. Determine whether variable costing income
from operations is less than or greater than absorption costing
income from operations.
b. Determine the difference in variable costing
and absorption costing income from operations.
$
Absorption costing does not distinguish between variable and fixed costs. All manufacturing costs are included in...
Absorption costing does not distinguish between variable and
fixed costs. All manufacturing costs are included in the cost of
goods sold.
Saxon, Inc.
Absorption Costing Income Statement
For the Year Ended December 31
1
Sales
$1,200,000.00
2
Cost of goods sold:
3
Beginning inventory
$0.00
4
Cost of goods manufactured
800,000.00
5
Ending inventory
(160,000.00)
6
Total cost of goods sold
640,000.00
7
Gross profit
$560,000.00
8
Selling and administrative expenses
289,000.00
9
Income from operations
$271,000.00
Under variable costing,...
Absorption costing does not distinguish between variable and fixed costs. All manufacturing costs are included in...
Absorption costing does not distinguish between variable and
fixed costs. All manufacturing costs are included in the cost of
goods sold.
Saxon, Inc.
Absorption Costing Income Statement
For the Year Ended December 31
1
Sales
$1,125,000.00
2
Cost of goods sold:
3
Beginning inventory
$0.00
4
Cost of goods manufactured
840,000.00
5
Ending inventory
(210,000.00)
6
Total cost of goods sold
630,000.00
7
Gross profit
$495,000.00
8
Selling and administrative expenses
275,000.00
9
Income from operations
$220,000.00
Variable Statement
Under...
Describe the characteristics of the manufacturing inventories and distribution inventories from the perspective of the manufacturing...
Describe the characteristics of the manufacturing inventories
and distribution inventories from the perspective of the
manufacturing industry.
Under absorption costing, fixed manufacturing overhead costs: a) are released from inventory when sales exceeds production...
Under absorption costing, fixed manufacturing overhead
costs:
a) are released from inventory when sales exceeds production
b) are treated as variable costs
c) are deferred into inventory when sales exceeds production
d) are ignored
e) are always treated as period costs
Stark Industries believes their indirect materials costs are a
variable cost, which change based on the number of units produced.
Last month's performance report showed that the flexible budget had
indirect materials cost totaling $8,500 for the month and...
Under absorption costing and variable costing, how are fixed manufacturing costs treated? a b c d
Under absorption costing and variable costing, how are fixed
manufacturing costs treated?
a
b
c
d
Absorption Statement Absorption costing does not distinguish between variable and fixed costs. All manufacturing costs are...
Absorption Statement
Absorption costing does not distinguish between variable and
fixed costs. All manufacturing costs are included in the cost of
goods sold.
Saxon, Inc.
Absorption Costing Income Statement
For the Year Ended December 31
Sales
$1,200,000
Cost of goods sold:
Cost of goods manufactured
$800,000
Ending inventory
(200,000)
Total cost of goods sold
(600,000)
Gross profit
$600,000
Selling and administrative expenses
(290,000)
Operating income
$310,000
Variable Statement
Under variable costing, the cost of goods manufactured includes
only variable manufacturing...
Absorption Statement Absorption costing does not distinguish between variable and fixed costs. All manufacturing costs are...
Absorption Statement
Absorption costing does not distinguish between variable and
fixed costs. All manufacturing costs are included in the cost of
goods sold.
Saxon, Inc.
Absorption Costing Income Statement
For the Year Ended December 31
Sales
$1,200,000
Cost of goods sold:
Cost of goods manufactured
$800,000
Ending inventory
(200,000)
Total cost of goods sold
(600,000)
Gross profit
$600,000
Selling and administrative expenses
(290,000)
Operating income
$310,000
Variable Statement
Under variable costing, the cost of goods manufactured includes
only variable manufacturing...
ADVERTISEMENT
ADVERTISEMENT
Latest Questions
- Please write a paper about the qualification process to serve as an investment adviser. Does an...
- A property costs $100,000. A borrower can obtain an 80% loan with an 8% interest rate...
- Scenario 13‐2: Upgrading a Cluster to Windows Server 2016 As an administrator at the Contoso Corporation,...
- A 2.90-kg box is sliding along a frictionless horizontal surface with a speed of 1.8 m/s...
- At 650 K, the reaction MgCO3(s)<->MgO(s)+CO2(g) has Kp=0.026. A 10.1L container at 650 K has 1.0g...
- Knowledge Management has become a crucial component of a competitive organization and this argues that knowledge...
- History of world civilization: What does the Tao-te Ching influence, and reveal about the Chinese civilization?...
ADVERTISEMENT