1 UGBA 102B Section 2 (Chapter 2) Handout GSI: Young Yoon [email protected]Section: Tuesdays and Thursdays 1:00 – 3:30 PM (Registration Link) GSI Office Hours: Tuesdays 12:00 – 1:00 PM (Link) Question 4 from Tuesday Question 4: ABC Corporation has experienced a steady increase in its cost per unit even though total costs have remained stable. This cost per unit increase may be due to ________ costs if the level of activity at ABC is ________. A) fixed, decreasing B) fixed, increasing C) variable, decreasing D) variable, increasing Cost per unit = (Fixed Costs + Variable Costs) / Activity Total costs remained stable => Numerator is constant Cost per unit increased => Denominator is decreasing As the level of activity decreases, Fixed cost per unit increases => A is the answer Variable cost per unit stays constant => C cannot be the answer
2 1. Absorption costing and Job-order costing Absorption costing:All manufacturing costs, both fixed and variable, are assigned to units of product—units are said to fully absorb manufacturing costs. ▪e.g. Apple produced 100 iPhones, which cost them $50,000. Then each iPhone absorbs $500 (=$50,000 / 100 iPhones) in manufacturing costs. ▪GAAP requires absorption costing for external financial reports ▪All nonmanufacturing costs are treated as period costs and they are not assigned to units of product Job-order costing:▪Used when many different products are produced each period ▹e.g. An Apple factory (Foxconn) makes different types of smartphones. ▪Each order of a specific product is called a job ▹e.g. An order of 10,000 iPhone 11 is called a job. ▪Costs are traced and allocated to jobs▹e.g. Direct material $2MN, direct labor $2MN, overhead $1MN Total cost allocated to the job: $5MN ▪Costs of the job are divided by the number of units to get average cost per unit ▹e.g. The total allocated cost $5MN / 10,000 units = $500 cost per unit ▪Job-order costing is useful for planning sales / production and making pricing decisions ▹e.g. Apple may want to set the selling price based on a predefined markup percentage, say 80%, to establish a markup of $400 and a selling price of $900. With $400 gross profit, Apple will earn enough to cover all the nonmanufacturing costs and generate some residual profit.
3 2. Computing predetermined overhead rates Assigning manufacturing overhead to a specific job is complicated since manufacturing overhead is an indirect cost.