After reading this chapter, you should be able to answer the following questions:
How do I distinguish between various types of costs, including product, period, direct, indirect, prime, conversion, and overhead costs?
What risks are present when arbitrary methods of overhead allocation are used?
How does activity-based costing create more accurate product costs?
What is the difference between absorption and variable costing?
What are two methods of writing off an overallocation or underallocation of overhead?
This chapter explains how accountants classify costs and how they differentiate product and period costs, and direct and indirect costs. The chapter highlights the overhead allocation problem: how to accurately allocate indirect costs to products/services. In doing so, it contrasts traditional with activity-based costing. This chapter also discusses the difference between absorption costing and variable costing methods, and ...