Question

In: Accounting

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?)

Solutions

Expert Solution

Fixed manufacturing costs are fixed for a given period, it will not change accoeding to the changes in the production level.

Inventory costs are costs which are directly relatble to the production of such items.The term directly attributable means that, any change in the volume of production will also cause change in such expendture.

In variable costing & throughput accounting, it gives considertaions only to variable costs for computation of inventory costs.They exclude fixed manufacturing cost from cost of inventory. The rational behind the same is as explanied above, fixed cost do not effected by units of production, so it need not be added as cots or production.

Comapnies choose ixed cost as periodic cost, because it normally remain fixed for a given period.It does not change according to production. For example, rent for factory building will remain constant for a given period of time, irresepctive of the production.


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