Question

1) How do you calculate and incorporate fixed manufacturing overhead cost into cost of goods sold under absorption costing? Do you have to factor in goods produced as well as goods sold for this aspect of cost of goods sold?

2) When comparing variable costing net income and absorption costing net income, how do you know whether you are adding or deducting fixed manufacturing overhead deferred or released from inventory under absorption costing?

Answer 1

Q1) Fixed manufacturing overhead costs into cost of goods sold under absorption costing are based on periodic costing so we will just show them in the product cost without thinking about number of units produced.

No, we do not have to factor in goods produced as well as goods sold for this aspect of the cost of goods sold because fixed manufacturing overhead are not affected due to change in production and sales volume.

Q2.While comparing variable costing net income and absorption costing net income, we add or deduct fixed manufacturing overhead deferred or released from inventory under absorption costing as follows-

1. When production is equal to sales, meaning there is no difference in the beginning and ending inventories, the operating income under both methods are the same so there is no need to add or deduct fixed manufacturing overhead deferred or released from inventory.

2. When production is greater than sales, i.e. ending inventory is greater than the beginning inventory, the operating income under absorption costing is greater so we deduct fixed manufacturing overhead deferred or released from inventory to reconcile with the income under variable costing.

3. When production is less than sales, i.e. ending inventory is less than the beginning inventory, operating income under variable costing is greater so we add fixed manufacturing overhead deferred or released from inventory to reconcile with the income under variable costing.

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