Describe the Basic Differences Between Absorption and Variable Costing

question 87

Essay

Describe the basic differences between absorption and variable costing.Why are managers sometimes motivated to produce too much inventory when income is computed under an absorption costing system?

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Definitions:

Assembly Department

A segment within a manufacturing facility where components are assembled into final products or where significant assembly work takes place.

Allocation Bases

Criteria or methods used for distributing indirect costs to different products, services, or departments based on predefined factors such as labor hours, machine hours, or material costs.

Direct Labor Hours

Measures the total hours worked by employees directly involved in the production process, used for calculating labor costs and efficiency.

Machine Hours

A measure of the amount of time a machine is operated, used to allocate machine costs to products or job orders.