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Fixed manufacturing costs flow into expense in the period incurred as illustrated in the top right section of Exhibit 2-3.
This method provides some advantages and some disadvantages for internal reporting, (as we shall see in Chapter 8, Chapter 11, and Chapter 13).
In this method only direct material costs are charged to the inventory. The concept is symbolized in the top left section of Exhibit 2-3.
Sales, less direct material costs is referred to as throughput which reflects how the method got its’ name.
However, it does not provide proper matching because the current fixed costs associated with producing the inventory are charged to expense regardless of whether or not the output is sold during the period.
a capability of recording inventory cost flows at certain intervals.The amount of factory overhead charged to the inventory is determined by multiplying the predetermined rate by the actual quantity of the activity measure.The difference between the applied overhead costs and the actual overhead costs represents an overhead variance.The Full Absorption Method Full absorption costing (also referred to as full costing and absorption costing) is a traditional method where all manufacturing costs are capitalized in the inventory, i.e., charged to the inventory and become assets.This means that these costs do not become expenses until the inventory is sold.
The purpose of this section is to explain how the various methods, subsystems, or parts fit together to form a cost accounting system. Chapter 2: Cost Accounting Systems and Manufacturing Statements. Five Parts of a Cost Accounting System A cost accounting system requires five parts that include: 1. Selecting one part from each category provides a basis for developing an operational definition of a specific cost accounting system. Input Measurement Bases The basis of a cost accounting system begins with the type of costs that flow into and through the inventory accounts.