Under the variable costing method, the cost that is omitted from inventoriable costs is termed _________?
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Answer: B. fixed manufacturing cost
Explanation
Under the variable costing method, fixed manufacturing overhead is treated as a period expense rather than being added to inventory. Consequently, it is deliberately omitted from inventoriable product costs. This distinguishes variable costing from traditional absorption costing methods. Variable costing, also known as direct costing, capitalizes only variable production costs into inventory accounts. Fixed manufacturing overhead is expensed entirely in the period incurred because it represents capacity costs. Proponents argue this prevents managers from manipulating income by overproducing inventory.
Variable costing is widely used for internal management decision-making, cost-volume-profit analysis, and short-term pricing. External financial reporting regulations, however, require traditional absorption costing for tax and public disclosures. Variable factory overhead and variable manufacturing costs are included in inventory under variable costing. Fixed factory overhead is the exact expense omitted from inventory valuation under this specific method.
- Subject
- Accounting and Finance
- Category
- Accounting
- Topic
- —
- Difficulty
- medium
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