Week 2 ACCT312 Cost management systems - جامعة نزوى · PDF fileTherefore variable and...
42
ACCT312 Week 2 Cost management systems 1
Transcript of Week 2 ACCT312 Cost management systems - جامعة نزوى · PDF fileTherefore variable and...
ACCT312
Week 2
Cost
management
systems
1
Variable
costing Absorption
costing
2
Cos measurement
systems
Process Job
Variable Absorption
Actual
Normal
Standard
Variable Absorption
Actual
Standard
Actual
Normal
Standard
Actual
Standard
Normal Normal
3
TOTAL COSTS
Manufacturing Non Manufacturing
Variable
Direct Costs
D. Materials
D. Labour
Sub-
contracts
Indirect Costs
Electricity
Indirect
materials
Variable Sales
and
Distribution
Commissions
Fuel
Variable
Admin
Telecommuni-
cations
Stationery
Fixed
Fixed Indirect
Costs
Rent
Depreciation
Supervisory
salaries
Security
Fixed Sales
and
Distribution
Rent
Depreciation
Salaries
Advertising
Fixed Admin
Rent
Depreciation
Salaries
Absorption Costing (Period Costs) 4
Absorption and variable costing
1. Absorption costing (also known as full costing)
traces/allocates variable and fixed manufacturing costs
to products and treats non-manufacturing overheads as
a period cost.
2. Variable costing (also known as marginal costing)
traces/allocates variable manufacturing costs to
products and treats fixed manufacturing overheads and
non-manufacturing overheads as a period cost.
3. Therefore variable and absorption costing differ only in
the treatment of fixed manufacturing overheads.
5
Absorption and variable costing
6
Costing Comparison
• Variable costing is a method of inventory costing in
which only variable manufacturing costs are included
as inventoriable costs
• Absorption costing is a method of inventory costing
in which all variable manufacturing costs and all
fixed manufacturing costs are included as
inventoriable costs
• Throughput Costing is a modified variable costing –
only Direct Materials are capitalized; all other costs
are expensed
7
Differences in Income
• Operating Income will differ between Absorption and
Variable Costing
• The amount of the difference represents the amount
of Fixed Product Costs capitalized as Inventory under
Absorption costing, and expensed as a period costs
under Variable Costing
8
Comparative Income Effects
Variable Costing Absorption Costing
Are fixed product
costs inventoried?
No
Yes
Is there a
production-volume-
variance?
No
Yes
9
Profit comparisons
• Profits are the same for both methods when production equals
sales (and there are no changes in stock levels)
• Where production exceeds sales (increasing stock levels) the
absorption costing system produces higher profits
• Where sales exceed production (declining stock levels) the
variable costing system produces higher profits
10
Comparative Income Effects
Variable Costing Absorption Costing
How do changes in
unit inventory affect
operating income
if…?
Production = Sales Equal Equal
Production > Sales Lower Higher
Production < Sales Higher Lower
11
Comparative Income Effects
Variable Costing Absorption Costing
What are the
effects on cost-
volume-profit (for a
given level of fixed
costs and a given
contribution margin
per unit?
Driven by:
unit level
of sales
Driven by:
1. Unit level of
sales
2. Unit level of
production
3. Chosen
denominator
level
12
Cos measurement
systems
Both Process
and job costing Variable
Absorption
Actual Normal
Standard
Actual
Standard
Normal
13
Variable and absorption costing, explaining operating-income
differences
Nascar Motors assembles and sells motor vehicles and uses
standard costing. Actual data relating to April and May 2008 are:
Exercise 9-16
14
The selling price per vehicle is $24,000.
The budgeted level of production used to calculate
the budgeted fixed manufacturing cost is for 500
units per period (month).
So, what is the fixed manufacturing rate per unit?
$2,000,000/500= $4,000
There are no price, efficiency, or spending variances.
Any production-volume variance is written off to cost
of goods sold in the month in which it occurs.
The following information is available:
15
1. Prepare April and May 2008 income
statements for Nascar Motors under:
(a) variable costing
(b) absorption costing
16
(a) variable costing
17
(b) absorption costing
18
2. Prepare a numerical reconciliation and explanation of
the difference between operating income for each month
under variable costing and absorption costing.
The difference between absorption and variable costing is due solely to
moving fixed manufacturing costs into inventories as inventories increase (as
in April) and out of inventories as they decrease (as in May).
19
Extreme Variable Costing:
Throughput Costing
• Throughput costing (super-variable costing) is a
method of inventory costing in which only direct
material costs are included as inventory costs. All
other product costs are treated as operating expenses
20
Throughput Costing Illustrated
21
Exercise 9-18
Variable and absorption costing, explaining operating-
income differences
BigScreen Corporation manufactures and sells 50-inch
television sets and uses standard costing.
The selling price per unit is $2,500.
The budgeted level of production used to calculate the
budgeted fixed manufacturing cost per unit is 1,000
units.
There are no price, efficiency, or spending variances.
Any production-volume variance is written off to cost
of goods sold in the month in which it occurs.
22
Actual data relating to January, February, and
March of 2009 are:
23
Prepare income statements for BigScreen in
January, February, and March of 2009 under
(a) variable costing and
(b) considering the changes in beginning and
ending inventories calculate expected income
under absorption costing (no income statement
is required)
24
(a) variable costing
25
(b) considering the changes in beginning and endi
ng inventories, calculate expected income under a
bsorption costing (no income statement is require
Income under absorption costing =Income under variable costing +(net change (+-) in inventories × fixed manufacturing overhead rate
January: $160,000+ (300 -0)× $400) = $280,000
February: $260,000 +(300 - 300) × $400 = $260,000
March: $960,000 +(50-300)× $400 =$860,000
26
Costing Systems Compared
27
Comparison of Alternative Inventory
Costing Systems
• Variable Direct Manufacturing Cost for both methods
Actual Costing Normal Costing Standard Costing
Actual Prices
X
Actual Quantity
of inputs used
Actual Prices
X
Actual Quantity
of inputs used
Standard prices
X
Standard Quantity
of inputs allowed
for actual output
achieved
28
Comparison of Alternative Inventory
Costing Systems
• Variable Indirect Manufacturing Cost for both methods
Actual Costing Normal Costing Standard Costing
Actual variable
indirect rates
X
Actual quantity of
cost-allocation
bases used
Budgeted variable
indirect rates
X
Actual quantity of
cost-allocation
bases used
Standard variable
indirect rates
X
Standard quantity of
cost-allocation
bases allowed for
actual output
achieved
29
Comparison of Alternative Inventory
Costing Systems
• Fixed Direct Manufacturing Cost only for absorption costing
• Not very common (usually all fixed costs are considered
as indirect
Actual Costing Normal Costing Standard Costing
Actual prices
X
Actual quantity
of inputs used
Actual prices
X
Actual quantity
of inputs used
Standard prices
X
Standard quantity
of inputs allowed
for actual output
achieved
30
Comparison of Alternative Inventory
Costing Systems
• Fixed Indirect Manufacturing Cost only for absorption
costing
Actual Costing Normal Costing Standard Costing
Actual fixed
indirect rates
X
Actual quantity
of cost-allocation
bases used
Budgeted fixed
indirect rates
X
Actual quantity
of cost-allocation
bases used
Standard fixed
indirect rates
X
Standard quantity
of cost-allocation
bases allowed for
actual output
achieved
31
Comparison of Alternative Inventory
Costing Systems
• Except actual costing, there could be over or under
applied when using overhead rates
32
Performance Issues and Absorption
Costing
• Managers may seek to manipulate income by producing too many units
• Production beyond demand will increase the amount of inventory on hand
• This will result in more fixed costs being capitalized as inventory
• That will leave a smaller amount of fixed costs to be expensed during the period
• Profit increases, and potentially so does a manger’s bonus
33
Inventories and Costing Methods
• One way to prevent the unnecessary buildup of
inventory for bonus purposes is to base manager’s
bonuses on profit calculated using Variable Costing
• Drawback: complicated system of producing two
inventory figures – one for external reporting and the
other for bonus calculations
34
Other Manipulation Schemes Beyond
Simple Overproduction
• Deciding to manufacture products that absorb the
highest amount of fixed costs, regardless of demand
(“cherry-picking”)
• Accepting an order to increase production, even
though another plant in the same firm is better suited
to handle that order
• Deferring maintenance
35
Management Countermeasures for Fixed
Cost Manipulation Schemes
• Careful budgeting and inventory planning
• Incorporate an internal carrying charge for inventory
• Change (lengthen) the period used to evaluate performance (e.g. 3 years or more)
• Include nonfinancial as well as financial variables in the measures to evaluate performance
36
Exercise 9-21
Absorption and variable costing
Osawa, Inc., planned and actually manufactured 200,000 units of
its single product in 2009, its first year of operation.
Variable manufacturing cost was $20 per unit produced.
Variable operating (non-manufacturing) cost was $10 per unit
sold.
Planned and actual fixed manufacturing costs were $600,000.
Planned and actual fixed operating (non-manufacturing) costs
totaled $400,000.
Osawa sold 120,000 units of product at $40 per unit.
37
1. Osawa’s 2009 operating income using
absorption costing is:
(a) $440,000
(b) $200,000
(c) $600,000
(d) $840,000
(e) none of these
38
Answer: (a)
39
2. Osawa’s 2009 operating income using
variable costing is:
(a) $800,000
(b) $440,000
(c) $200,000
(d) $600,000
(e) none of these
40
Answer: (c)
41
Which method?
• Some arguments in support of variable costing
– Variable costing provides more useful information for decision-
making
– Variable costing removes from profit the effect of stock
changes
– Variable costing avoids fixed overheads being capitalized in
unsaleable stocks
• Some arguments in support of absorption costing
– Absorption Costing does not understate the importance of fixed
costs
– Revenue Production Concept favours absorption costing
– Consistency with external reporting
42
