3. Under absorption costing, profits are affected by both sales and produc-
tion. If production exceeds sales, then a portion of the fixed manufac-
turing overhead cost of the period will be deferred to the future. In pe-
riods where these deferrals of fixed manufacturing overhead cost take
place, profits will be inflated, as in July for Warner Company. If produc-
tion is less than sales, then fixed manufacturing overhead costs that
were deferred in inventory and carried over from prior periods will be re-
leased from inventory and charged as an expense on the income state-
ment. In addition, if production in these months is less than planned,
then underapplied overhead will result, which, when added to the costs
being released from inventory through inventory reduction, will depress
Case 7-18 (continued)
In sum, with profits dependent on both sales and production under ab-
sorption costing, profits can move erratically, depending on the relation
between sales and production in a given period.
Bạn đang xem 3. - SOLUTIONS TO QUESTION MANAGERIAL ACCOUNTING CH07 VARIBLE COSSTING TOOL FOR MANAGEMENT