201-Wk8-Abs vs Var costing-F'10

201-Wk8-Abs vs Var costing-F'10 - Mgmt. 201 Week #8...

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page 1 Mgmt. 201 – 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 and decision making 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. Introduce throughput costing. VI. 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 I. Absorption and variable costing differences Production costs have to go somewhere: Production Costs for 1,000 units made DM + DL + VOH $ 30,000 FOH 20,000 TOTAL $ 50,000 Where does the $50,000 go? Inventory Expensed immediately ABSORPTION COSTING Expensed when sold Inventory Expensed immediately VARIABLE COSTING Expensed when sold
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page 7 II. Absorption net income versus Variable net income Absorption net income and variable net income may be quite different. In this section we want to understand what causes this difference. Problem 1 - The difference between absorption income and variable income
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This note was uploaded on 03/27/2012 for the course MGMT 201 taught by Professor Rowe during the Fall '08 term at Purdue University-West Lafayette.

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201-Wk8-Abs vs Var costing-F'10 - Mgmt. 201 Week #8...

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