Chapter 5 discusses how variable and absorption costing are alternative methods of determining unit product costs.

Chapter 5 discusses how variable and absorption costing are alternative methods of determining unit product costs. Under variable costing, only those manufacturing costs that vary with output are treated as product costs. This includes direct materials, variable overhead, and direct labor. Fixed manufacturing overhead is treated as a period cost and is expensed on the income statement as incurred. Following absorption costing, fixed manufacturing overhead is treated as a product cost, along with direct materials, direct labor, and variable overhead. Under both costing methods, selling and administrative expenses are treated as period costs expensed on the income statement when incurred.

1. Do you feel that fixed manufacturing overhead costs should be treated as product costs or period costs and why? What are some managerial advantages to variable costing? What are some drawbacks of variable costing?
2. Which way is the proper way to report fixed manufacturing overhead costs following GAAP?
3. How does Lean Production impact the net operating income when comparing income between absorption costing and variable costing?