In this session, we use our knowledge of cost behavior to compute product costs per unit based on absorption and variable costing methods. We also explore the role of fixed overhead costs in variable costing and how the treatment of fixed overhead impacts the absorption costing and variable costing income statements differently. We also explore how absorption and variable costing incomes will differ when production does not equal sales.
We continue our exploration by looking at how production planning can be impacted by abuse of the absorption costing method. We introduce setting a target pricing (cost-plus or cost-based) pricing, variable costing for services, and how to convert income from variable costing to absorption costing.
