Cost Management: Measuring, Monitoring, and Motivating Performance, 2nd Edition

CHAPTER 14

Measuring and Assigning Costs for Income Statements

In Brief

Accountants use absorption costing for inventory and cost of goods sold when preparing financial statements according to U.S. generally accepted accounting principles (GAAP) and International Financial Reporting Standards (IFRS). Under absorption costing, all production costs, including allocated overhead, are assigned to units manufactured. This accounting method provides useful information by matching production costs against revenues. However, managers often need information about incremental costs when making short-term operating decisions. Variable costing and throughput costing are two methods that accountants use to provide managers with incremental cost information.

This Chapter Addresses the Following Questions:

• Q1 How are absorption costing income statements constructed?
• Q2 How are variable costing income statements constructed?
• Q3 How are throughput costing income statements constructed?
• Q4 What factors affect the choice of production volume measures for allocating fixed overhead?
• Q5 How do income statement costing methods affect managers' incentives and decisions?

INVENTORY: SCARCITY OR ABUNDANCE?

Channel stuffing (also known as “trade loading”) is the practice of forcing more products than can be sold through a distribution channel, artificially inflating revenues and reducing cost of goods ...