Sunday, March 2, 2008

Absorption Costing and CVP Analysis

Absorption costing will not support CVP analysis because it treats fixed manufacturing overhead as a variable cost by assigning a per unit amount of the fixed overhead to units of production.

Treating fixed manufacturing overhead as a variable cost can:

  1. Lead to faulty pricing decisions
  2. Create wrong drop/add decisions
  3. Produce positive net operating income while the number of units sold is less than the breakeven point.
More information on CVP Analysis

Manufacturing Overhead Variable Cost

CVP Relationships Income Statement

Assumptions of CVP Analysis

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