Mowen3e Ch08--revised 03.04.2011

Mowen3e Ch08--revised 03.04.2011 - Chapter Eight Absorption...

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Unformatted text preview: Chapter Eight Absorption and Variable Costing, and Inventory Management Learning Objectives 1. Explain the difference between absorption and variable costing. 2. Prepare segmented income statements. 3. Discuss inventory management under the economic order quantity and just-in-time (JIT) models. 2 OBJECTIVE 1 Explain the difference between absorption and variable costing. Absorption Costing Income Statement Assigns all manufacturing costs to the product Direct Materials Direct Labor Variable Overhead Fixed Overhead Fixed overhead is applied to the product using a predetermined overhead rate Required by generally accepted accounting principles (GAAP) for external reporting 4 Variable Costing Income Statement Assigns only variable manufacturing costs to the product Direct Materials Direct Labor Variable Overhead Whats missing here? Fixed overhead is treated as a period expense 5 HOW TO Compute Inventory Cost under Absorption Costing 6 Example Information: 7 Units in beginning inventory Units produced Units sold ($300 per unit) Variable costs per unit: Direct materials Direct labor Variable overhead Fixed costs: Fixed overhead per unit produced Fixed selling and administrative---- 10,000 8,000 $ 50 100 50 25 100,000 Example Required: 8 1. How many units are in ending inventory? 2. Using absorption costing, calculate the per- unit product cost. 3. What is the value of ending inventory? Example Units ending inventory Units beginning inventory Units produced Units sold = + + 10,000 8,000 = = 2,000 Absorption Costing Direct Materials $ 50 Direct Labor Variable overhead Fixed overhead Unit product cost 100 50 $225 25 Value of ending inventory = 2,000 x $225 = $450,000 HOW TO Compute Inventory Cost under Variable Costing 11 Example Information: Units in beginning inventory Units produced Units sold ($300 per unit) Variable costs per unit: Direct materials Direct labor Variable overhead Fixed costs: Fixed overhead per unit produced Fixed selling and administrative---- 10,000 8,000 $ 50 100 50 25 100,000 Example Required: 13 1. How many units are in ending inventory? 2. Using variable costing, calculate the per- unit product cost. 3. What is the value of ending inventory? Example Units ending inventory Units beginning inventory Units produced Units sold = + + 10,000 8,000 = = 2,000 (no change) Variable Costing Direct Materials Direct Labor Variable overhead Unit product cost $ 50 100 50 $200 Only variable costs Variable Costing Direct Materials Direct Labor Variable overhead Unit product cost $ 50 100 50 $200 Value of ending inventory = 2,000 x $200 = $400,000 When inventory on hand exists, variable costing results in lower ending inventory than absorption costing. Absorption and Variable Costing DM DL Var OH Fixed OH DM DL Var OH Variable Costing Unit Cost Absorption Costing Unit Cost Absorption Costing includes Fixed Overhead in Unit Cost, Variable Costing does not. HOW TO Prepare an Absorption-Costing Income Statement 18 Example...
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This note was uploaded on 05/04/2011 for the course ACCOUNTING 2102 taught by Professor Wurst during the Spring '11 term at Temple.

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Mowen3e Ch08--revised 03.04.2011 - Chapter Eight Absorption...

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