Cost Management Session 7. Overview Theory Exercise: 10.33, 10.37, 10.56, 10.60 2.
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Transcript of Cost Management Session 7. Overview Theory Exercise: 10.33, 10.37, 10.56, 10.60 2.
Cost Management
Session 7
Overview
• Theory
• Exercise: 10.33, 10.37, 10.56, 10.60
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Theory
This costs method includes allocating direct material, direct labor, and both variable and fixed manufacturing overhead to the costs of production
The absorption costing method treats all cost as a cost of production whether they are variable or fixed.
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Absorption Costing
Variable (direct) costing
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Direct costing is a method used to determine the cost of a product by allocating its direct cost to it.
This method calculates the costs of production by including direct materials, direct labor and sometimes a variable portion of manufacturing overhead.
Throughput costing
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Is a costing method that assigns only the out-of-pocket spending as the cost of products or services.
Out-of-pocket costs are costs requiring cash payments in the current accounting period.
Exercise 10.33
(a) Compute the amount that overhead was over-applied or under-applied.
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Predetermined overhead rate = estimated overhead/estimated allocation base
= $900,000/100,000 hours
= $9 per hour
Applied overhead = predetermined overhead rate x actual allocation
base= $9 per hour x 110,000 hours
= €990,000
Overhead variance = applied overhead - actual overhead
= $990,000 - $980,000
= $10,000 overapplied
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(b)Should this variance be closed to Cost of sales?
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The overapplied overhead of 10.000 (+) can be divided into a negative overhead spending variance of 80.000 (900.000 minus 980.000) and a positive volume variance of 90.000 (110.000 - 100.000) * 9.
These two variances should stay in the department were they were caused, so no transfer to the cost of sales
Exercise 10.37
(a) Compute the standard accrual product cost per container of ketchup under (1) absorption costing and (2) variable costing
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Since there were no variances in 20x0, actual production and budgeted production must have been the same.
Predetermined fixed overhead rate
=
production budgeted
overhead fixed budgeted
= = kr 14 per unit
Direct material kr 35
Direct labor 14
Variable overhead 21
Standard cost per unit under variable costing kr 70
Fixed overhead per unit under absorption costing
14 Standard cost per unit under absorption costing
kr 84
b) Prepare a statement of income for 20x0 using (1)absorption costing and variable costing
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Revenue Kr 14,000,000
Less: Cost of sales
Cost of sales Kr 10,500,000
Gross margin Kr 3,500,000
Less: Selling and Adm. expenses
Fixed Kr 350,000
Variable Kr 875,000
Net Income Kr 2,275,000
(1)Absorption costing
(2) Variable costingRevenue Kr 14,000,000
Less: Variable expenses
Variable manufacturing costs Kr 8,750,000
Variable selling and administrative costs
Kr 875,000
Contribution margin Kr 4,375,000
Less: fixed expenses
Manufacturing overhead Kr 2,100,000
Selling and adm.expenses Kr 350,000
Net Income Kr 1,925,000
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c) Reconcile the income reported under the two methods
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Cost of sales under absorption costing kr 10,500,000 Less: Variable manufacturing costs under variable costing
kr 8,750,000
Difference kr 1,750,000
Less:Fixed manufacturing overhead as period expenseunder variable costing kr 2,100,000
Total kr (350,000)
Net income under variable costing kr 1,925,000 Less:Net income under absorption costing kr 2,275,000 Difference in net income kr (350,000)
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10.56
a) Prepare a variable-costing statement of income for the year.
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Revenue €465,000
Cost of sales:
Beginning inventory (€22,000 x 45%) € 9,900
Cost of goods manufactured (€315,000 x 70%) 220,500
Ending inventory (€86,000 x 70%) (60,200) 170,200
Variable selling costs (€83,000 x 80%) 66,400
Variable admin. costs (€49,800 x 40%) 19,920
Contribution margin208,480
Fixed manufacturing costs (€315,000 x 30%) 94,500
Fixed selling costs (€83,000 x 20%) 16,600
Fixed administrative costs (€49,800 x 60%) 29,880
Operating profit before tax (variable costing) € 67,500
b) Write a short report to management that explains why the company might be experiencing a cash-flow shortage despite the adequate income shown in its absorption-costing statement of income.
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Points to include in report to management:(1)Reconciliation of full-absorption operating profit to variable costing
operating profit. Operating profit before tax: absorption costing € 81,200 Add: fixed costs in beginning inventory (€22,000 x 55%) € 12,100 Deduct: fixed costs in ending inventory (€86,000 x 30%) € 25,800
Operating profit before tax: variable costing € 67,500 (2) Operating profit using full-absorption costing is high (relative to
variable costing) because fixed manufacturing costs are assigned both to goods sold and goods in inventory at the end of the period. Although some of the fixed manufacturing costs are deferred on the statement of income, they are likely paid for with cash in the current period.
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10.60
a) Compute the company’s total costs for the year assuming that (1) variable manufacturing costs are driven by the number of units produced and (2) variable selling and adm.costs are driven by the number of units sold.
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Total cost: Direct material (10,000 units x $12) $ 120,000Direct labour $ 45,000Variable manufacturing overhead $ 65,000Fixed manufacturing overhead $ 220,000Variable selling and administrative costs (9,600 units x $8) $ 76,800Fixed selling and administrative costs $ 118,000
Total $644,800
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b) How much of this cost would be held in year-end inventory under (1) absorption costing, (2) variable costing, and (3) throughput costing.
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(1)Absorption
Costing
(2)VariableCosting
(3)Throughput
Costing
Direct material $120,000 $120,000 $120,000
Direct labour 45,000 45,000 -
Variablemanufacturing
overhead
65,000 65,000 -
FixedManufacturing
overhead
220,000 - -
Total product cost $450,000 $230,000 $120,000
Cost per unit (total ÷ 10,000 units)
$45 $23 $12
Year-end inventory (400 units x cost per unit)
$18,000 $9,200 $4,800
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The cost of the year-end inventory of 400 units (10,000 units produced – 9,600 units sold) is computed as follows:
c)How much of the company’s total cost for the year would be included as an expense on the period’s statement of income under (1) absorption costing, (2) variable costing and (3) throughput costing?
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(1)Absorption
Costing
Direct material (3)Throughput
Costing
Cost of sales $432,000 $220,800 $115,200
Direct labour $45,000
Variabele manufacturing
overhead
$65,000
Fixed manufacturing overhead
$220,000 $220,000
Variable selling and adm. costs
$76,800 $76,800 $76,800
Fixed seeling and adm.costs
$118,000 $118,000 $118,000
Total $626,800 $635,600 $640,000
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d) Prepare the company’s throughput-costing statement of income.
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Sales revenue (9,600 units x $80) $768,000
Less: Cost of sales $115,200
Throughput $652,800
Less: Operating costs:
Direct labour $45,000
Variable manufacturing overhead $65,000
Fixed manufacturing overhead $220,000
Variable selling and administrative costs $76,800
Fixed selling and administrative costs $118,000
Total operating costs $524,800
Net income $128,000*
Net income = sales revenue - all costs expenses = $768,000 - $640,000 ([from req. (c)] = $128,000
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READY FOR TEST?
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See you next week!
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