Income effects alternative cost accumulation systems

8 important questions on Income effects alternative cost accumulation systems

Stock quantity decreases

AC<VC

Arguments in support of absorption costing:

  • Avoids fictuous losses
  • fixed overheads are essential for production
  • theoretically superior to variable costing
  • consistency with external reporting

Volatile sales and changing stock levels favours?

Variable costing
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Seasonal sales where stock are built up in advance favour?

Absorption costing

The average planned usage of capacity for the long run

Normal production level

From what can the cost of  rational capacity be recovered?

Normal production and sales

For what can the choice of a denominator be of crucial importance?

  • Pricing decisions
  • cost of unused capacity

Kaplan's death spiral:

  1. Higher prices
  2. lower sales
  3. lower production
  4. higher cost price

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