# 18_Overheads - Objectives for today Review two types of...

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ACC 333 (Farrell), Fall 2011, Class 18 1 ACC 333 (Far el ) Fal 2011, Class 18 1 Objectives for today Review two types of income statements – Absorption costing – Variable costing – When given one, how to compute the other Using variable costing: Cost-volume- profit (CVP) analysis – CVP model – Breakeven model – Assumptions underlying CVP analysis ACC 333 (Far el ) Fal 2011, Class 18 2 Absorption costing income statement On an absorption costing income statement: Cost of good sold (COGS) = DM + DL + OH Gross profit (a.k.a. gross margin) = Sales – COGS – Key subtotal that signals it’s absorption costing Costs are classified by functional area in the firm – Manufacturing vs. Non-manufacturing (SG&A) All costs to manufacture products sold are in COGS Why use this methodology? Required by GAAP – Gross profit enables external users to evaluate all costs of production needed to generate a certain level of sales, including investments in fixed assets ACC 333 (Far el ) Fal 2011, Class 18 3 Simple Absorption Costing Income Statement Sales \$2,000,000 Less: Cost of goods sold * 1,300,000 Gross margin \$700,000 Less operating expenses: Selling \$300,000 General & administrative 150,000 \$450,000 Operating income \$250,000 Income taxes \$75,000 Net income \$175,000 * Cost of good sold = DM+DL+Variable OH+Fixed OH

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ACC 333 (Farrell), Fall 2011, Class 18 2 ACC 333 (Far el ) Fal 2011, Class 18 4 Variable costing income statement On a variable costing income statement: Contribution margin (CM) = Sales - variable costs Key subtotal that signals it’s variable costing Costs are classified by behavior – Variable vs. Fixed Why? – Variable costs are usually relevant in evaluating different decision alternatives – Easier to understand the impact of changes in sales on profit – Stresses the need to recoup (i.e., recover) fixed costs before profit is earned ACC 333 (Far el )
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18_Overheads - Objectives for today Review two types of...

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