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27/08/2022
Hi, this is chandlerm92 – business class question response:
Original question you answered:
If fixed manufacturing overhead costs are released from inventory under absorption costing, what does this tell you about the level of production in relation to the level of sales?
If fixed manufacturing overhead costs are released from inventory under absorption costing, then the level of production would be less in relation to the level of sales. The main reason behind it is that, in the absorption costing, if inventories raise in that case a part of the fixed manufacturing overhead costs of the existing period is deferred to future periods in the inventory account. Furthermore, at what time the units are taken out of inventory to sell then the deferred fixed costs flow all through to the income statement as part of (COGS) cost of goods sold (Kinney & Raiborn, 2012). Apart from this, fixed manufacturing overhead is treated as a product cost under absorption costing and for this reason is an asset in anticipation of products are sold. Consequently, if fixed manufacturing overhead costs are released from inventory the level of production will be less than sales.
References
Kinney, M.R., & Raiborn, C.A. (2012). Cost Accounting: Foundations and Evolutions (9th ed.). USA: Cengage Learning.
Response that came back to me that I need a response to (only needs to be about 50 word reply): Mary, I came up with something opposite than you. I read on page 162 that all manufacturing costs are treated as product costs whether they are variable or fixed. In the absorption method, fixed manufacturing overhead costs are included as part of the costs of work in process inventories. Once the units are completed then the costs are moved to the cost of goods sold on the income statement. With absorption costing you have no period expenses as you do with variable costing. Can you explain to me more about how you conclude “if inventories rise in that case a part of the fixed manufacturing overhead costs of the existing period is deferred to future periods in the inventory account? I could have my understanding flipped in some way. I also do not understand how product cost cost can be an asset in anticipation of being sold. The way I understood it when inventories are a work in process they are not considered as part of assets. Thank you for any suggestions and help you can offer.
The text he is referring to is Managerial Accounting for Managers (3rd Edition) by Noreen, Brewer, Garrison
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