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Summary

This chapter has discussed the effect of the relationship between fixed costs and variable costs on your income from operations. There is a complex interplay among these costs, the price that you charge for your products and the product quantities that you produce.

The absorption approach to costing allocates the fixed costs of production between goods that are sold and goods that remain in inventory at the end of an accounting period. This approach is used for external reporting purposes, because it more accurately estimates the value of the inventory asset as well as the income earned during the period.


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