Bhimani, Horngren,
Datar and Rajan,
Management and Cost Accounting, 5
th
Edition, Instructor’s Manual
© Pearson Education Limited 2012 expense them until the related units are sold. Fixed manufacturing costs are current period costs that AC defers to the future (making AC profit higher relative to VC profit.
Conversely, fixed manufacturing costs are costs deferred from prior periods that AC
expenses in the current period, when the related units are sold (making AC lower relative to VC). AC operating profit exceeds VC operating profit if there is a net deferral of fixed manufacturing costs and vice versa. The difference between AC and VC is more important for traditional manufacturers with lots of stock. Under IT, the distinction becomes less important since fixed manufacturing costs in the stocks can be immaterial if stocks are very low.
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