What Inventory Costing Methods Are Permissible Under GAAP? Explain the Impact

question 148

Essay

What inventory costing methods are permissible under GAAP? Explain the impact of these alternative methods on the income statement and the balance sheet.

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Definitions:

Budget Variance

The difference between the budgeted or planned amount of expense or revenue and the actual amount incurred or received.

Denominator Activity

The level of activity used to compute a predetermined overhead rate, representing the total amount of absorption base that is expected to be utilized.

Efficiency Variances

Refers to the differences between the actual and standard costs attributable to efficiency in using resources, often analyzed in labor and variable overhead.

Predetermined Overhead Rate

An estimated rate used to assign manufacturing overhead costs to individual units of production, based on a chosen activity base.