201-Wk8-Abs vs Var-S'12 (STUD)

201-Wk8-Abs vs Var-S'12 (STUD) - Mgmt. 201 Managerial...

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page 1 Mgmt. 201 – Managerial Accounting – Week #8 Absorption Costing versus Variable Costing versus Throughput Costing Prof. Thoman page 2 Absorption costing versus Variable costing For financial reporting how was the product costing done? For cost-volume-profit model, what kind of product costing is useful?
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page 3 Overview of the chapter and lectures This week we will: I. Formally define absorption and variable costing. II. Learn why profits under “absorption” and “variable” costing may not always be the same. III. Examine a manager’s incentives when absorption costing is used. IV. Look at advantages and disadvantages of variable and absorption costing. Ask why financial reporting requires absorption costing. V. Work additional problems. page 4 I. Absorption and variable costing defined Full absorption costing, absorption costing, or full costing Assign all manufacturing costs (fixed manufacturing overhead as well as direct material, direct labor, and variable manufacturing overhead) to the units produced Variable costing or direct costing Assign variable manufacturing costs (direct labor, direct materials, & variable manufacturing overhead) to the product; treat fixed manufacturing costs as an expense of the period Which manufacturing costs are product costs and which are period costs? Absorption Costing (Old stuff) Variable Costing (New stuff) Product costs: Costs initially inventoried; expensed only when goods are sold Period costs: Costs expensed in period they occur
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page 5 I. Absorption and variable costing report formats Absorption Costing Format Variable Costing Format or Contribution Margin Format Sales Revenue Sales Revenue Less: COGS: Less: Variable costs: Variable manufacturing costs of units sold Variable manufacturing costs of units sold Fixed manufacturing costs Variable marketing costs of units sold Variable administrative costs GROSS MARGIN CONTRIBUTION MARGIN Less: Marketing & administrative costs: Less: Fixed costs: Variable marketing costs Variable administrative costs Fixed manufacturing costs of the period Fixed marketing costs Fixed marketing costs Fixed administrative costs Fixed administrative costs NET INCOME NET INCOME page 6
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page 7 II. Absorption and variable income differences – 1 st Example Absorption net income and variable net income may be quite different. In this section we want to understand what causes this difference. Suppose the Big Crate Company uses actual costing and in each period manufactures 5 crates. Actual costs are as follows: Variable manufacturing costs (DM + DL + VOH) per crate: $5/unit Total fixed manufacturing costs (FOH): $100 No selling or administrative costs When FOH is assigned to products, each crate is allocated the same amount of FOH. What is the FOH rate? Absorption cost per crate
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201-Wk8-Abs vs Var-S'12 (STUD) - Mgmt. 201 Managerial...

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