1. Absorption costing, which includes both fixed and variable manufactur-
ing costs in the product cost, is widely considered to be required on ex-
ternal financial reports in the United States.
2 A company with sales below the break-even point may be able to report
a profit if its inventories increase. Break-even points are computed as-
suming that fixed costs are expensed in the year in which they are in-
curred. However, if production exceeds sales and the company uses ab-
sorption costing, then a portion of the fixed manufacturing costs will be
included as part of ending inventories on the balance sheet rather than
being expensed on the income statement.
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