441. Under both costing methods, selling and administrative expenses are treated as period costs and are expensed on the income statement as incurred.442. If units of product are unsold at the end of a period, then the fixed manufacturing overhead cost attached to those units is carried in ending inventory on the balance sheet rather than being recognized as an expense within cost of goods sold on the income statement.443. Thus, under absorption costing, it is possible to defer a portion of the fixed manufacturing overhead cost from one period to a future period through the inventory account.444. To guard against mistakes when they interpret income statement data, managers should be alert to changes in inventory levels or unit product costs during the period.445. A company’s common fixed expenses should not be allocated to segments when performing break-even calculations because they will not change in response to segment-level decisions.446. Super-variable costing treats direct labor as a fixed period expense whereas variable costing treats direct labor as a variable product cost.447. If a company treats direct labor as a variable cost, the cost system may encourage managers to treat labor costs as an expense to be minimized when sales decline and this may result in reduced morale and eventual problems when business picks up.448. Second, in practice management may have little ability to adjust the direct labor force even if they wanted to, resulting in a situation in which direct labor costs are in fact fixed.449. In either case, treating direct labor costs as variable can lead to bad decisions. The super-variable costing approach overcomes this problem by treating labor costs as fixed costs.450. Activity-based costing (ABC) is ordinarily used as a supplement to, rather than as a replacement for, a company’s usual costing system.451. Most organizations that use activity-based costing have two costing systems—the official costing system that is used for preparing external financial reports and the activity-based costing system that is used for internal decision making and for managing activities.452. In contrast, this chapter explains how manufacturing companies can use activity-based costing rather than traditional methods to calculate unit product costs for the purposes of managing overhead and making decisions.453. Thus, ABC includes manufacturing and nonmanufacturing costs when calculating the entire cost of a product rather than just its manufacturing cost.454. Commissions paid to salespersons, shipping costs, and warranty repair costs are examples of nonmanufacturing costs that can be directly traced to individual products.455. Second, ABC systems allocate indirect nonmanufacturing costs to products whenever the products have presumably caused the costs to be incurred.456. In summary, ABC product cost calculations include all direct costs that can be traced to products and all indirect costs that are caused by products.457. Organization-sustaining costs include costs such as the factory security guard’s wages, the plant controller’s salary, and the cost of supplies used by the plant manager’s secretary.458. These types of manufacturing overhead costs are assigned to products in a traditional absorption costing system even though they are totally unaffected by which products are made during a period.459. In contrast, in activity-based costing, products are charged only for the cost of the capacity they use—not for the cost of the capacity they don’t use.460. The overhead costs that are caused by products are allocated to them, whereas any overhead costs that are not caused by products are treated as period costs.
