[kahtwoloo]

I know the rules of stuff buts not translating into me being able to problems on my own. I’m hung up on “fixed manufacturing overhead is treated as a product cost and is inventoried”. It’s neat that that happens and all but what exactly happens when an expense is “inventoried”. I just don’t get it even after read through the material and examples no less that five times.

BEC-51,71,70,77
AUD-50,62,68 (retake july)
REG-55
FAR-15(didnt study)

[impska]

Essentially, you capitalize the cost in your inventory.

If I manufacture airplanes and in building 1 airplane, I incur $10M in fixed overhead costs and $30M of other costs (Direct labor, Direct labor, variable overhead), then under absorption costing, the airplane's cost is $40M. The inventory account absorbs the fixed costs along with other costs.

Under variable costing, only variable costs are included in inventory. So your airplane has a balance sheet cost of $30M (in an inventory account) and you've expensed $10M of fixed costs as a period cost.

Absorption costing is what is used for traditional GAAP income statements. Variable costing is sometimes useful for managerial accounting for internal decision-making.

By treating fixed overhead as an inventoriable cost, what you're doing is showing it on the Balance Sheet as part of the total value of your inventory. With variable costing, it skips the Balance Sheet and turns up on the Income Statement as an expense.

With absorption costing, the entire $40M only hits the Income Statement when you sell the plane – in the form of Cost of Goods of Sold.

REG - 94
BEC - 92
FAR - 92
AUD - 99

[impska]

Essentially, you capitalize the cost in your inventory.

If I manufacture airplanes and in building 1 airplane, I incur $10M in fixed overhead costs and $30M of other costs (Direct labor, Direct labor, variable overhead), then under absorption costing, the airplane's cost is $40M. The inventory account absorbs the fixed costs along with other costs.

Under variable costing, only variable costs are included in inventory. So your airplane has a balance sheet cost of $30M (in an inventory account) and you've expensed $10M of fixed costs as a period cost.

Absorption costing is what is used for traditional GAAP income statements. Variable costing is sometimes useful for managerial accounting for internal decision-making.

By treating fixed overhead as an inventoriable cost, what you're doing is showing it on the Balance Sheet as part of the total value of your inventory. With variable costing, it skips the Balance Sheet and turns up on the Income Statement as an expense.

With absorption costing, the entire $40M only hits the Income Statement when you sell the plane – in the form of Cost of Goods of Sold.

REG - 94
BEC - 92
FAR - 92
AUD - 99

[kahtwoloo]

Oh capitalize. It makes a lot more sense when you word it like that. I think I have good grasp on it now. Thanks!

BEC-51,71,70,77
AUD-50,62,68 (retake july)
REG-55
FAR-15(didnt study)

[kahtwoloo]

Oh capitalize. It makes a lot more sense when you word it like that. I think I have good grasp on it now. Thanks!

BEC-51,71,70,77
AUD-50,62,68 (retake july)
REG-55
FAR-15(didnt study)

[Author]

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