Question

You work for a multinational company with multiple business segments. Your manager explains that he believes fixed overhead should just be included in product costs. With examples from the lesson readings or your own life, explain to your manager why you agree or disagree with him.

Answer 1

The view expressed by the manger is partly correct. All fixed overhead costs except fixed manufacturing overhead are expensed as period costs under both absorption and variable costing system. Fixed manufacturing overhead costs on the other hand are considered as product costs under absorption costing system but period costs and expensed as incurred under variable costing system. Companies are invariable required to use absorption costing system for external financial reporting under the U.S GAAP but variable costing system on other hand is used within the organizations for managerial decision making purposes. The examples of fixed manufacturing overhead include factory supervisor salary, factory depreciation, factory property taxes and factory insurance etc.