Fifth edition Alnoor Bhimani Charles T. Horngren Srikant M. Datar Madhav V. Rajan Farah Ahamed


Comparison of standard variable costing and standard absorption costing



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Comparison of standard variable costing and standard absorption costing
The PVV is the difference between lump sum budgeted fixed manufacturing costs that are allocated to WIP. Since fixed manufacturing costs are not allocated to WIP under VC (fixed manufacturing costs are expensed as incurred, there can be no PVV under VC. Stress the intuition behind formula 1. VC expenses all fixed manufacturing costs in the period incurred. AC allocates fixed manufacturing costs to units produced in this period and does not


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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