...Group Case Project: Absorption Costing vs. Variable Costing Javkhlantugs Altansukh Ana Barrios Cameron R. Bates Kyle Brown Absorption Costing Absorption costing is a costing system in which the direct labor, direct materials, and fixed and variable manufacturing overhead costs are traced to every finished product. Thus, in the absorption costing system, all costs are product costs regardless of their classification of variable or fixed. Because of its characteristic of no cost discrimination, absorption costing is also known as full costing or as full absorption method (¨Absorption¨ 1). The absorption costing is the only method approved by the generally accepted accounting matching principle (GAAP). Thus, it is required by law to use this system for external financial statements (Lohrey 1). The absorption costing also provides accuracy of the calculation in taxes reporting (1). Experts say that the absorption costing method provides a complete picture of cost calculation and it is helpful to accurately track profit during an accounting period (Cunagin 1). In fact, this method is in compliance with the GAA matching principle which states that all expenses and revenues must be reported in the same period (Lohrey 1). Production Process A simplified production process starts with the purchase of direct materials and ends with the sale of the finished goods. To account this process the following steps should be made. When the direct materials are purchased, they...
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...In comparison to absorption costing which is used for external purpopses and which is required by accounting standards, variable costing is a costing tool that is used for internal decision-making purposes. The logic of variable costing differs from absorption costing as it assigns only variable costs to inventory and cost of goods sold. When using variable costing your product costs would therefore consist of Direct Material, Direct Labor, and Variable Manufacturing Overhead. With variable costing variable SG& A expenses, and fixed SG&A expenses are classified as period expenses – new is that also fixed manuf. OH costs are assigned to period costs. Since variable costing and absorption costing classify costs differently, the per unit costs that are calculated under each system differ. On the slide you can see an example of a situation where product costs under absorption and variable costing are calculated. When taking a look at absorption costing and variable costing you notice that the per unit cost differs by $4. Let’s take a look how the different prices are calculated. For absorption costing you take direct material for $5 into account, you add $4 for direct labor, then you add variable manuf. OH for $1, then you take fixed MOH per year which are $20,000 and divide them by sells, in this case 5,000 units and you get $4 which have to be added to the unit costs. As a result you get $14 per unit. Under variable costing you disregard fixed MOH and simply add up direct materials...
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...Comparison of Variable and Absorption Costing OMGT422 – Managerial Accounting August 7, 2015 P S Summary There are two types of costing methods and they are absorption and variable costing methods and they refer to the way in which product costs are determined. Absorption costing is a method that aims to include all expenses including overheads in the calculation of the cost of producing goods or services and variable costing treats fixed factory overhead as a period expense. These variable costs consist of direct materials, direct labor, and variable factory overhead. Most companies use absorption and variable costing together, both of the systems have their own benefits and limitations. Absorption Costing * According to Mowen & Heitger chapter 8, “absorption costing uses fixed factory overhead as a product cost. Unit product cost consists of direct materials, direct labor, variable factory overhead, and fixed factory overhead.” Companies may use absorption costing if they want to gain a full understanding of the extent to which costs are covered by sales income. An absorption cost is required for external reporting and is a general accepted accounting principle that the Internal Revenue Service will accept. * Variable Costing * Variable costing treats fixed factory overhead as a period expense. Unit product cost consists of direct materials, direct...
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...Costing Methods Paper LaKeisha R. Fields ACC/561- Accounting July 15, 2013 Facilitator: Shirley Smith Costing Methods Paper Introduction-Absorption vs. Variable Costing In managerial accounting there are two cost methods that can be utilized for the purpose of presenting financial data in a manufacturing environment. They consist of absorption and variable costing methods. Although they are somewhat similar they have key differences that impact a company. In absorption costing the profit is attached to the unit of each item produced. The fixed costs associated in the manufacturing are also considered. This leaves much uncertainty to the actual price to the unit produce. In variable costing the accuracy is much more accepted in managerial accounting. Yet, the fixed costs are not attached the product costing because they change often. The use of these methods has its benefits in accounting; and will leave much to consideration in decision making by many managers working in production. Here as follows are some of those benefits and a possible decision-making consideration that can be beneficial in a low biding by competition in a manufacturing industry. Benefits of the Two Methods According to Articlebase.com in an article titled “Absorption vs. Variable Costing”, there are benefits to each cost methods in accounting. In Absorption costing the benefit of it would be that a company can have an inventory of finished goods. These finished goods are a part of the fixed...
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...ABSORPTION VS VARIABLE COSTING LECTURE BREAKEVEN ANALYSIS Absorption Costing vs Variable Costing Remember: An asset is a resource of the company that gives a future economic benefit. Inventories are assets because they give future benefits to the company in the terms of sales revenue. Absorption costing: includes all manufacturing costs --- including direct materials, direct labor, and BOTH variable and fixed manufacturing overhead. Absorption Costing = Full Costing Under absorption costing, fixed overhead is a product cost until sold. Absorption costing makes no distinction between fixed and variable costs thus is not suited for CVP analysis. Sales less Absorption Cost of Goods Sold will equal Gross Profit Functional Analysis of the Income Statement Variable costing: includes only variable manufacturing costs --- direct materials, direct labor, and variable manufacturing overhead. The entire amount of fixed costs are expenses in the year incurred. When calculating Contribution Margin, Variable Cost of Goods Sold and Variable Selling and Administrative Expenses and subtracted from Sales. Behavioral Analysis of the Income Statement Variable costing can be used for Cost Volume Profit (Break-even Analysis) Rules about Absorption Costing versus Variable Costing. Rules about unit sales and production under the two costing methods. If sales are variable and production constant. a. When production is equal to sales, then absorption costing...
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...Costing Methods February 8, 2016 Costing Methods There are two costing methods studied in Chapter 19: absorption costing and variable costing. Absorption costing is the standard for use in the generally accepted accounting principles (GAAP) for external reporting (Kimmel, Weygandt, & Kieso, 2011). Variable or absorption for this company In the scenario given, absorption costing would be the better option. Products under absorption costing “absorb” all costs, including the fixed costs. As a result, the income statement prepared under absorption costing has a net loss of only $4,956 compared to the variable costing income statement net loss of $41,898. The net loss in either case will signal a red flag, but the absorption costing net loss is significantly less than the variable costing net loss. (Kimmel, Weygandt, & Kieso, 2011). Benefits of variable and absorption costing There are some potential benefits and times to use each different method. For example, if the number of units that has been manufactured is greater than the number of units that have been sold, the absorption costing method will show a higher net income in the income statement. Conversely, it might be beneficial to use variable costing when the units that have been sold outnumber the units that have been manufactured since the net income in this income statement will be higher than under absorption costing (Wink & Corradino, 2010). This is not due to the costing method, however, since another...
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...in Cost Control Discussion 2, Fixed and Variable Costs WEEK 2 Written Assignment Case 3A (Auerbach Enterprises) Discussion 1, Product Costs Discussion 2, Job Order Costing vs. Process Costing WEEK 3 Written Assignment Case 5A (Glaser Health Products) Discussion 1, Allocating Joint Costs Discussion 2, Variable/Absorption Costing WEEK 4 Written Assignment Case 6B (Chester & Wayne) Discussion 1, Budgeting Comments Discussion 2, Standard Cost System Journal Budgets and Employee Morale WEEK 5 Discussion 1, Capital Investment Evaluation Discussion 2, Ranking Investment Alternatives Written Assignment Case 9A (Middlehurst House) WEEK 6 Final Paper, Analyze the Role of Managerial Accounting Discussion 1, Evaluating Performance Discussion 2, Non value- Added Costs in a Doctor's Office BUS 630 Managerial Accounting Entire Course Week 1 to 6 Purchase here http://homeworkonestop.com/BUS%20630/bus-630-managerial-accounting-entire-course-week-1-to-6 Product Description BUS 630, Managerial Accounting WEEK 1 Written Assignment, Case 2B (Mendel Paper Company) Discussion 1, Ethics in Cost Control Discussion 2, Fixed and Variable Costs WEEK 2 Written Assignment Case 3A (Auerbach Enterprises) Discussion 1, Product Costs Discussion 2, Job Order Costing vs. Process Costing WEEK 3 Written Assignment Case 5A (Glaser Health Products) Discussion 1, Allocating Joint Costs Discussion 2, Variable/Absorption Costing WEEK 4 Written Assignment Case 6B (Chester...
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...A Revised Income Statement, The Contribution Margin Approach ACC403-Principles of Accounting Module 2 - CASE 1. Prepare income statements under variable (contribution margin) and traditional (absorption) costing for the year ended December 31, 2008. The E Company Income statement for year ending December 31, 2008 Absorption / Contribution Product Information: | | | | | | Units Produced | 400,000 | | Units Sold | 345,000 | | Selling Price per Unit | $19.00 | | Direct Material Cost per Unit | $3.50 | | Direct Labor Cost per Unit | $1.40 | | Variable Selling Costs per Unit | $1.20 | | Fixed Manufacturing Costs | $1,600,000 | | Fixed Selling & Administrative Costs | $1,200,000 | | | | | | | | Absorption (GAAP) Income | | | | | Revenues (Sales) | | $6,555,000 | Cost of Goods Sold (Cost of Sales) | | 3,070,500 | Gross Profit (Gross Margin) | | $3,484,500 | Selling & Administrative Expenses | | 1,614,000 | Operating Income | | $1,870,500 | | | | | | | Contribution Margin Income Statement | | | | | Revenues (Sales) | | $6,555,000 | Variable Costs: | | | Direct Material | $1,207,500 | | Direct Labor Cost | 483,000 | | Variable Selling Expenses | 414,000 | | Total Variable Costs | | $2,104,500 | Contribution Margin | | 4,450,500 | Fixed Costs | | 2,800,000 | Operating Income | | $1,650,500 | | | | 2. What are E's contribution margin ratio...
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...MARGINAL COSTING Introduction: MARGINAL COST: Marginal Cost is the additional cost of producing an additional unit of product. In simple, marginal cost is the extra cost of an extra unit of production. It is the total of all variable costs. It composed of all direct costs and variable costs. The CIMA, London, defines marginal cost “as the amount at any given volume of output by which aggregate costs are changed, if volume of output is increased or decreased by one unit”. In other words, it is the cost of one unit of product which would be avoided if that unit were not produced. MARGINAL COSTING: It is also known as “VARIABLE COSTING” or “DIRECT COSTING”. The CIMA, London, defines marginal costing as “The accounting system in which variable costs are charged to cost units and fixed costs of the period are written off in full, against the aggregate contribution. Its special value is in decision making.” Marginal is a technique of costing, in which only variable costs are charged as product costs and included in inventory valuation. Fixed manufacturing costs are not allowed to products. CHARACTERISTICS OF MARGINAL COSTING: 1. Segregation of all costs into fixed and variable elements . 2. Marginal costs (variable costs) as product costs, are only charged to products. 3. Fixed costs as period costs, are charged to costing P &L account. 4. Contribution: is the difference between sales value and marginal cost of sales. 6. Pricing: In marginal costing, Prices...
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...Costing Methods ACC 561 July 15, 2014 Costing Methods Absorption and variable costing are two methods an organization such as Polk Company can employ when accounting for costs and generating income statements. The differences between the two methods are focused on the types of costs absorbed or assigned to the product, specifically fixed and variable overhead expenses as well as when fixed overhead manufacturing costs are allocated. In absorption costing all costs are charged to the product including direct materials, direct labor, variable manufacturing overhead, and fixed manufacturing overheard (Kimmel, Weygandt, Kieso, 2011). In variable costing direct materials, direct labor, and variable manufacturing overhead is charged to the product, and fixed overhead expenses are considered period costs (Kimmel et al. 2011). In addition, full absorption costing is considered a generally accepted accounting principle (GAAP) and used for external reporting purposes whereas variable costing is used for internal reporting (Stevenson, Barnes, & Stevenson, 1993). The Polk Company benefits more from using the absorption method because the overhead expense is allocated on the basis of 80,300 units sold. The variable costing method calculates the fixed overheard costs based on the 94,500 units produced for the period. In this case the absorption method provides management with a more accurate assessment of the fishing lure profitability. Under the absorption costing method, the product...
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...561 Kurt Meyer 9/12/14 Comparison between Absorption Costing vs Variable Costing Questions: 1) In this case, would it be better to use the variable or absorption costing method, and why? Variable Costing would prove to be less expensive: Manufacturing Cost per unit: Absorption is $18.71 Variable Cost $16.17 Variance is $2.54 more with Absorption Reason - under Absorption Costing fixed Manufacturing OH are a product cost and under Variable costing it is a period cost and so it is expensed. The data from Week 5 assignment 19-17, each unit sold and each unit still in inventory is an amount paid under absorption costing. 2) What are the benefits of the two methods? Absorption-Assigned cost per unit in inventory has a value that’s part of the fixed overhead; expense is shown when item is sold, this can improve your profits for this period when you do not sell all of your products. Variable-Shows all the expenses have been paid for this accounting period, although you have not received revenue for some in inventory, this will show as surplus income once you finally sell. 3) Which method would lead to the best decision when a competitor is submitting a lower bid for your product? Variable costing would be the best decision when competitors come with a lower bid for your product. Net Income under variable costing changes is sales levels not production levels; provides...
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...Tutorial 6. Variable vs. Absorption Costing 1. Variable and absorption costing, explaining operating-income differences. BigScreen Corporation manufactures and sells 50-inch television sets and uses standard costing. Actual data relating to January, February, and March of 2012 are as follows: | |January |February |March | |Unit data | | | | | Beginning inventory |0 |300 |300 | | Production |1,000 |800 |1,250 | | Sales |700 |800 |1,500 | |Variable costs | | | | | Manufacturing cost per unit produced |$900 |$900 |$900 | | Operating (marketing) cost per unit sold |$600 |$600 |$600 | |Fixed costs | | | | |Manufacturing costs |$400,000 |$400,000...
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...Problems HO #4 (1) Variable Costing Income Statements: 2011 2012 Sales 1,000 units Sales 1,200 units Production 1,400 units Production 1,000 units Revenues ($3 per unit) $3,000 $3,600 Variable Costs: Beginning Inventory $ 0 $ 200 Variable cost of goods manufactured 700 500 Cost of goods available for sale 700 700 Deduct ending inventorya (200) (100) Variable cost of goods sold 500 600 Variable operating costs 1,000 1,200 Variable costs 1,500 1,800 Contribution Margin 1,500 1,800 Fixed Costs: Fixed manufacturing costs 700 700 Fixed operating costs 400 400 Total fixed costs 1,100 1,100 Operating income $ 400 $ 700 a Unit inventoriable costs: Year 1: $700 / 1,400 = $0.50 per unit; $0.50 x (1,400 – 1,000) Year 2: $500 / 1,000 = $0.50 per unit; $0.50 x (400 + 1,000 – 1,200) (2) Absorption-costing income statements: 2011 2012 Sales 1,000 units Sales 1,200 units Production 1,400 units Production 1,000 units Revenues...
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...Marginal Costing Dr. Shubhra Product Costing There are mainly two techniques of product costing and income determinationAbsorption Costing: This is a total cost technique under which total cost (i.e., fixed cost as well as variable cost) is charged as production cost. In other words, in absorption costing, all manufacturing costs are absorbed in the cost of the products produced. Marginal Costing: An alternative to absorption costing is marginal costing, also known as ‘variable costing’ or direct costing. Under this technique, only variable costs are charged as product costs and included in inventory valuation. Fixed manufacturing costs are not allotted to products but are considered as period costs and thus charged directly to Profit and Loss Account of that year. Fixed costs also do not enter in stock valuation. Marginal Costing: Definition CIMA London as ‘The accounting system in which variable costs are charged to cost units and fixed costs of the period are written off in full, against the aggregate contribution. Its special value is in decision making’. Segregation of costs into fixed and variable elements • In marginal costing all costs are classified into fixed and variable. Semi-variable costs are also segregated into fixed and variable elements. Marginal costs as products costs • Only marginal (variable) costs are charged to products produced during the period. Fixed costs as period costs • Fixed costs are treated as period...
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...Introduction According to Chand (2015), costing techniques are used by management for controlling cost and making managerial decisions. It systematically records expenses and analyses the cost of each product manufactured or service rendered by an organisation (Hariharan, n.d.). Firms choose to adapt to a specific costing theory that caters accordingly to their needs and objectives. Part 1: Evaluation of Costing Theories Costing theories are very important in business decision making. According to Hariharan (n.d.), they serve managers as a guide to make correct decisions such as what price to quote, whether to place order for inputs or whether to abandon or add a product to the production line. Costing theories also determines the price of the best alternative use of a factor of production and results in an efficient allocation of resources (Chand, 2015). The business will adopt the most profitable production inputs by identifying unprofitable activities, losses and inefficiencies (Chand, 2015) Costing theories also helps the decisions regarding the capital expenditure through the estimation of long-run function (Chand, 2015). This function will be useful to managers when deciding on the expansion or contraction of plant size in the firm and confirming that the present plant size is just nice for the output level that is being produced (Chand, 2015). It improves the overall productivity of an organisation and acts as an important guide in bringing prosperity to the firm (Vitez...
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