022410 - Managers Dilemmas: 1. What is the cost of a unit...

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Manager’s Dilemmas: 1. What is the cost of a unit if I use: Variable Costing vs. Absorption Costing? 1. What is the cost of ending inventory on the balance sheet if I use: Variable Costing vs. Absorption Costing? 1. What is the net operating income if I use: Variable Costing vs. Absorption Costing? 1. Why might I prefer: Variable Costing over Absorption Costing? Kattelus - Spring 2010 1
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EXAM I X = 77/100 Range 30 – 100 Two questions to review (1) COGS -- Adjusted or Unadjusted?? (2) Definition of Cost of Goods Manufactured = UNITS COMPLETED DURING THE PERIOD (no matter whether they were started last period or this period) Go over exams with Brittany or Ryan in RM 204 Discuss grade issues with me Kattelus - Spring 2010 2
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Absorption costing: advantages Required for taxes and used for GAAP financial reporting Might be used in compensation calculations More prevalent Better meets the matching principle Kattelus - Spring 2010 3
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Absorption costing: disadvantages Not suited for CVP because fixed costs are in the product Essentially treats fixed manufacturing overhead as a variable cost by assigning a per unit amount of the fixed overhead to each unit of production Produces positive NOI even when the number of units sold is less than the breakeven point Kattelus - Spring 2010 4
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Variable costing: advantages More useful for managers who are not accountable for fixed costs Better suited for C-V-P analysis (“what if” ) Easier to understand because NOI is only affected by changes in unit sales Produces NOI figures that are more consistent with managers’ expectations (closer to cash flows) Kattelus - Spring 2010 5
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Variable costing: disadvantages Must prepare a different income statement for taxes and GAAP, and maybe compensation purposes Not acceptable for GAAP financial reporting Kattelus - Spring 2010 6
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NOI under Variable Costing When production exceeds sales, net operating income reported under variable costing generally will be: A.greater than net operating income reported under absorption costing. B. less than net operating income reported under
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022410 - Managers Dilemmas: 1. What is the cost of a unit...

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