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Discuss the reason for using an absorption rate in determining the variable cost variances as well...

Discuss the reason for using an absorption rate in determining the variable cost variances as well as using an applied fixed overhead in the fixed overhead volume variance.

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Answer #1

Absorption costing means a way to value inventory by assigning all fixed and variable manufacturing costs to the merchandise.

Below are the Key factor or reason to use absorption rate instead of variable rate

  1. Absorption costing differs from variable costing because it allocates fixed overhead costs to each unit of a product produced in the period.
  2. Absorption costing allocates fixed overhead costs to a product whether or not it was sold in the period.
  3. This type of costing means that more cost is included in the ending inventory, which is carried over into the next period as an asset on the balance sheet.
  4. Because more expenses are included in ending inventory, expenses on the income statement are lower when using absorption costing.
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