Overhead Application:Variable and Absorption

Costing

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The differences between variable-costing and absorption-costing methods are based on the treatment of fixed manufacturing overhead.

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-Variable costing excludes fixed manufacturingoverhead from inventoriable costs.

-Absorption costing treats fixed manufacturingoverhead as inventoriable costs.

-The fixed-overhead rate is the amount offixed manufacturing overhead applied toeach unit of production.

-It is determined by dividing the budgetedfixed overhead by the expected volumeof production for the budget period.

Under absorption costing, fixed overhead appears in the cost of goods sold.

Under variable costing, fixed overhead is a period cost.

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