Alternative Costing Systems

Actual vs. Standard Costing:
Cost Accounting: Foundations and Evolutions– Standard costing is base on budgets
Full Costing (Absorption) vs. Variable Costing:
-Differs in the treatment of fixed overhead
Full costing: fixed overhead is assigned to units of inventory and show up in the income statement as part of the COGS when the units are sold.  When units are produced and not sold, fixed overhead stays in finished goods inventory.  Therefore, if inventories increase during a period (i.e. production exceeds sales), the full costing method will report higher operating income since unsold inventory will be “held up” in inventory and won’t hit the income statement until the units are sold. 
              Revenue
            – Direct costs  [variable mfg (direct material and labor) and fixed mfg (factory overhead) ]
              Gross margin
            – Indirect costs (variable SG&A and fixed SG&A)
              Operating profit
Variable costing: no fixed overhead is assigned to inventory.   Fixed overhead is a period expense which enters the income statement as a line-item every period regardless of the number of units sold
              Revenue
            – Variable costs  [variable mfg (direct material and labor) and variable SG&A ]
              Contribution margin
            – Fixed costs [fixed mfg (factory overhead) and fixed SG&A ]
              Operating profit
Alternative Costing System – Click on image to enlarge

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