CHAPTER9InventoryCostingandCapacityAnalysis

Chapter9learningobjectivesIdentifywhatdistinguishesvariablecostingfromabsorptioncostingComputeincomeundervariablecostingandabsorptioncostingandexplainthedifferenceinincomeUnderstandhowabsorptioncostingcanprovideundesirableincentivesformanagerstobuildupinventoryDifferentiatethroughputcostingfromvariablecostingandabsorptioncosting9-2

Chapter9learningobjectives,concludedDescribethevariouscapacityconceptsthatfirmscanuseinabsorptioncostingExaminethekeyfactorsmanagersusetochooseacapacityleveltocomputethebudgetedfixedmanufacturingcostrateUnderstandotherissuesthatplayanimportantroleincapacityplanningandcontrol9-3

Chapterfocus:

inventory- denominator-

costing levelcapacityTheinventorycostingsystemthatischosendetermineswhichmanufacturingcostsaretreatedasinventoriablecosts.Thedenominator-levelcapacitychoicefocusesonthecostallocationbaseusedtosetbudgetedfixedmanufacturingcostrates.9-4

InventoryCostingChoices:OverviewVariablecosting—amethodofinventorycostinginwhichallvariablemanufacturingcosts(directandindirect)areincludedasinventoriablecosts.(Alsoknownasdirectcosting)Absorptioncosting—amethodofinventorycostinginwhichallvariableandfixedmanufacturingcostsareincludedasinventoriablecosts.Youcansaythatinventory“absorbs”allmanufacturingcosts.Throughputcosting—onlydirectmaterialsarecapitalized;allothercostsareexpensed.9-5

Inventorycosting:

DifferencesinIncomeOperatingincomewilldifferbetweenabsorptionandvariablecosting.Theamountofthedifferencerepresentstheamountoffixedmanufacturingcostscapitalizedasinventoryunderabsorptioncostingandexpensedasaperiodcostundervariablecosting.Ifinventorylevelschange,operatingincomewilldifferbetweenthetwomethodsbecauseofthedifferenceinaccountingforfixedmanufactu