11-27-2017, 02:09 PM
FitDat.com is a newly incorporated company that manufacturers a small battery-operated fitness monitor. This hand-held gadget sends data to its user’s smartphone during exercise. Virtually all of its sales are expected to be web-based. These days, its management accountant is studying the two famous costing methods - absorption costing and variable costing that the company can use to determine its product cost. Under absorption costing, all manufacturing costs, including fixed manufacturing overhead, are treated as product cost and stored in inventory until the inventory is sold. Under variable costing, fixed manufacturing overhead is not included in the cost of inventory. Here, fixed manufacturing overhead is treated as a period cost and is expensed during the period in which it is incurred. The company intends to employ such costing method which ensures true and fair reporting of its income in the financial statements.
Point of Discussion:
- Which of the costing method with an increased inventory level would produce higher income? (2 Marks)
- Why in “a” above, the income would be increased? (3 Marks)
- Which of the costing method is consistent with cost-volume-profit analysis? (2 Marks)
- What would be the reason behind consistency discussed in “c” above? (3 Marks)
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