An Extreme Version of Variable Costing

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The Answer is Solution to An Extreme Version of Variable Costing (20 minutes)
a.The following table shows that profits are lower by $1,460 if computed using Goldratt's suggestion:

Solution to An Extreme Version of Variable Costing (20 minutes) a.The following table shows that profits are lower by $1,460 if computed using Goldratt's suggestion: b.Goldratt's proposal extends variable costing to the writing off of direct labor and variable overhead cost when incurred.The proposal creates strong incentives against building inventories.Labor and overhead costs in inventories are written off against earnings instead of being capitalized into inventory.Thus,profits and assets are lower when inventories are added compared to full absorption costing.Since product costs contain labor and overhead,calculating product costs using only materials understates true product costs.

b.Goldratt's proposal extends variable costing to the writing off of direct labor and variable overhead cost when incurred.The proposal creates strong incentives against building inventories.Labor and overhead costs in inventories are written off against earnings instead of being capitalized into inventory.Thus,profits and assets are lower when inventories are added compared to full absorption costing.Since product costs contain labor and overhead,calculating product costs using only materials understates true product costs.

An Extreme Version of Variable Costing

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