Shahadat Hosan Faculty ( Part-time), MBA Program Stamford University Bangladesh Variable Costing: A...
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Transcript of Shahadat Hosan Faculty ( Part-time), MBA Program Stamford University Bangladesh Variable Costing: A...
Shahadat HosanFaculty ( Part-time), MBA ProgramStamford University Bangladesh
Variable Costing: A Tool for Managemet
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Overview of Absorption and Variable Costing
The only cost of driving my caron a 200 mile trip today is
$12 for gasoline.
VariableCosting
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Overview of Absorption and Variable Costing
No! You must consider these costs too!
AbsorptionCosting
Cost Per month Per day
Car payment 300.00$ 10.00$
Insurance 60.00 2.00
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Overview of Absorption and Variable Costing
You are wrong. I have the carpayment and the
insurance payment even ifI do not make the trip.
VariableCosting
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Overview of Absorption and Variable Costing
Who’s right?How should we treat the carpayment and the insurance?
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Overview of Absorption and Variable Costing
Direct Materials
Direct Labor
Variable Manufacturing Overhead
Fixed Manufacturing Overhead
Variable Selling and Administrative Expenses
Fixed Selling and Administrative Expenses
VariableCosting
AbsorptionCosting
ProductCosts
PeriodCosts
ProductCosts
PeriodCosts
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Variable costing
Balance Sheet Costs Inventories
Note: Manufacturing Cost Flows
Income StatementExpenses
Cost of GoodsSold
Selling andAdministrativePeriod Costs
Work in Process
FinishedGoods
Raw Materials
VariableManufacturing
Overhead
Material Purchases
Direct Labor
Selling andAdministrative
FixedManufacturing
Overhead
Absorption costing
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Let’s put some numbers to theissue and see if it will
sharpen our understanding.
Overview of Absorption and Variable Costing
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Harvey Co. produces a single product with the following information available:
Unit Cost Computations
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Unit product cost is determined as follows:
Selling and administrative expenses arealways treated as period expenses and
deducted from revenue.
Unit Cost Computations
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Absorption CostingSales (20,000 × $30) 600,000$ Less cost of goods sold: Beginning inventory -$ Add COGM (25,000 × $16) 400,000 Goods available for sale 400,000 Ending inventory (5,000 × $16) 80,000 320,000 Gross margin 280,000 Less selling & admin. exp. Variable FixedNet operating income
Harvey Co. had no beginning inventory, produced 25,000 units and sold 20,000 units this year.
Income Comparison of Absorption and Variable Costing
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Harvey Co. had no beginning inventory, produced 25,000 units and sold 20,000 units this year.
Absorption CostingSales (20,000 × $30) 600,000$ Less cost of goods sold: Beginning inventory -$ Add COGM (25,000 × $16) 400,000 Goods available for sale 400,000 Ending inventory (5,000 × $16) 80,000 320,000 Gross margin 280,000 Less selling & admin. exp. Variable (20,000 × $3) 60,000$ Fixed 100,000 160,000 Net operating income 120,000$
Income Comparison of Absorption and Variable Costing
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Variable CostingSales (20,000 × $30) 600,000$ Less variable expenses: Beginning inventory -$ Add COGM (25,000 × $10) 250,000 Goods available for sale 250,000 Less ending inventory (5,000 × $10) 50,000 Variable cost of goods sold 200,000 Variable selling & administrative expenses (20,000 × $3) 60,000 260,000 Contribution margin 340,000 Less fixed expenses: Manufacturing overhead 150,000$ Selling & administrative expenses 100,000 250,000 Net operating income 90,000$
Now let’s look at variable costing by Harvey Co.Variable
costsonly.
All fixedmanufacturing
overhead isexpensed.
Income Comparison of Absorption and Variable Costing
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Let’s compare the methods.
Income Comparison of Absorption and Variable Costing
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Reconciliation
Variable costing net operating income 90,000$ Add: Fixed mfg. overhead costs deferred in inventory (5,000 units × $6 per unit) 30,000 Absorption costing net opearting income 120,000$
Fixed mfg. overhead $150,000 Units produced 25,000 units
= = $6.00 per unit
We can reconcile the difference betweenabsorption and variable income as follows:
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Harvey Co. Year 2
In its second year of operations, Harvey Co. started with an inventory of 5,000 units, produced 25,000
units and sold 30,000 units.
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Harvey Co. Year 2
Unit product cost is determined as follows:
No change in Harvey’scost structure.
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Harvey Co. Year 2
Now let’s look at Harvey’s income statementassuming absorption costing is used.
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Absorption CostingSales (30,000 × $30) 900,000$ Less cost of goods sold: Beg. inventory (5,000 × $16) 80,000$ Add COGM (25,000 × $16) 400,000 Goods available for sale 480,000 Less ending inventory - 480,000 Gross margin 420,000 Less selling & admin. exp. Variable (30,000 × $3) 90,000$ Fixed 100,000 190,000 Net operating income 230,000$
Harvey Co. Year 2
These are the 25,000 unitsproduced in the current period.
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Harvey Co. Year 2
Next, we’ll look at Harvey’s income statementassuming is used.
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Harvey Co. Year 2Variable
costsonly.
All fixedmanufacturing
overhead isexpensed.
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Advantages of the Contribution Approach
Advantages
Management finds it easy to understand.
Consistent withCVP analysis.
Net operating income is closer to
net cash flow.
Profit is not affected bychanges in inventories.
Consistent with standardcosts and flexible budgeting.
Impact of fixedcosts on profitsemphasized.
Easier to estimate profitabilityof products and segments.
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Fixed costs arenot really the costs
of any particularproduct.
VariableCosting
Variable versusAbsorption Costing
AbsorptionCosting
All manufacturingAll manufacturingcosts must be assignedcosts must be assignedto products to properlyto products to properlymatch revenues andmatch revenues and
costs.costs.
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
AbsorptionCosting
These are capacitycosts and will be
incurred even if nothingis produced.
Variable versusAbsorption Costing
VariableCosting
Depreciation,taxes, insurance andsalaries are just as
essential to productsas variable costs.
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
VariableCosting
Absorptioncosting product costs
are misleading fordecision making.
They are the numbers that appear on our
external reports.
AbsorptionCosting
Variable versusAbsorption Costing
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Note on theEffects of Volume
COGS for 10,000 units
$100,000
$150,000
$200,000
Number of units produced
CO
GS
Absorption CostingCost of goods sold decreases because production
exceeds sales, leaving a portion of fixedmanufacturing costs in inventory.
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Impact of JIT Inventory Methods
In a JIT inventory system . . .
Productiontends to equalsales . . .
So, the difference between variable andabsorption income tends to disappear.
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Thank You