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example is the allocation of factory overhead to units
of inventory produced during a period and remaining on
hand at period-end.
Minter et al., Handbook of Accounting and Auditing C2.06[4] (2001
ed.). One area of uncertainty concerns the treatment of fixed
overhead costs. In Belkaoui, the Handbook of Cost Accounting
Theory and Techniques 289 (1991), the author states: “The issue
of whether inventories should be costed at variable or full cost
remains a subject of debate in both academic and business worlds.
The controversy centers mainly on two inventory valuation
methods: the direct or variable costing method and the
absorption or full costing method.” That debate is relevant to
our analysis since, as Professor Belkaoui states: “The main
difference between product costing methods lies in the accounting
treatment of fixed manufacturing overhead. Under the direct
costing method, the fixed manufacturing overhead is regarded as a
period cost (that is, an expired cost to be immediately charged
against period sales). ” Id. at 291. Under the absorption
costing method, on the other hand, “all the manufacturing costs,
whether variable or fixed, are treated as product costs and hence
inventoried with the products.” Id.1 Fixed overhead, thus, is
only released to offset receipts as it flows into cost of goods
1 Professor Belkaoui adds: “Consequently, under absorption
costing, the period costs are limited to both selling and
administrative overhead.” Belkaoui, Handbook of Cost Accounting
Theory and Techniques, 291 (1991).
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