...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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...ASSIGNMENT ON COSTING Submitted By, MOHAMMED NAFAISE QUESTIONS 1. Define the term cost. Explain various types with relevant examples? 2. Methods and techniques of with relevant industrial examples? COST The cost is defined as the amount which is paid or given up to get something or to achieve the objective of the business. In business the objective may be to make a product, to provide a particular service and so on. Cost is usually a monetary valuation of effort, material, resources, time and utilities consumed risks incurred, and opportunity forgone in production and delivery of a good or service. The costs incurred by a business may be classified in various ways and one important way is according to how they behave in relation to changes in the volume of activity. There are: Based on behavior two types of cost are there 1.FIXED COST: those are fixed when changes occur to the volume of activity. Ex: the salary of employees, rent… 2.VARIABLE COST: these are cost which vary according the volume of activity. Ex: cost of raw materials used in manufacturing a product. DIFFERENT TYPES OF COST WITH EXAPLES * SEMI-FIXED(SEMI-VARIABLE )COST: In some cases, particular costs have an element of both fixed and variable cost. Thesecan be described as semi-fixed (semi-variable) costs. * Ex: telephone bill, electricity bill. * Actual Cost Actual cost is defined as the cost or expenditure which...
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...MANAGMENT ACCOUNTING Launchbreak LTD 1. Be able to analyse cost information within a business 1.1 classify different types of cost 1.2 use different costing methods 1.3 calculate costs using appropriate techniques 1.4 analyse cost data using appropriate techniques 2. Be able to propose methods to reduce costs and enhance value within a business 2.1 prepare and analyse routine cost reports 2.2 use performance indicators to identify potential improvements 2.3 suggest improvements to reduce costs, enhance value and quality 3. Be able to prepare forecasts budgets for a business 3.1 explain the purpose and nature of the budgeting process 3.2 select appropriate budgeting methods for the organisation and its needs 3.3 prepare budgets according to the chosen budgeting method 3.4 prepare a cash budget 4. Be able to monitor performance against budgets within a business 4.1 calculate variances, identify possible causes and recommend corrective action 4.2 prepare an operating statement reconciling budgeted and actual results 4.3 report findings to management in accordance with identified responsibility centres COMPANY BACKGROUND Launchbreak LTD is a small manufacturing company that makes cakes, which are sold to supermarkets and grocery stores. You work as an accounts manager at Launchbreak LTD, reporting to the general manager. 1.1(a) Managment accounting is one kind of accounting which is designated to provide business leaders...
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...Question 1 Introduction This report aims to compare the differences between Traditional costing system and Activities Based Costing (ABC) system. The advantages and disadvantages of both concepts determine which method is more superior for the business. Traditional costing concepts Traditional costing is to consider how much will cost to produce a product. It plays an important role in the business to predicting the profitability of a product. Traditional costing is also well known as the conversional method costing, which refers to the allocation of manufacturing overhead costs to the product manufactured (Harold, n.d.). Traditional costing assigns manufacturing overhead on the basis of volume of a cost driver, such as direct labor hours, production machine hours or direct material hours, all of which are needed to produce an item and the number of units produced. Different from activity- based costing, traditional costing is emphasis on costing information of external financial report in the business, because it provides the value of cost of goods sold. Many manufacturing companies use traditional costing system in order to divide the total cost of a product by the direct labor cost. Generally, the traditional costing method users make the assumption that the volume metric is the underlying driver of manufacturing overhead cost. Hence, under traditional costing method, accountants regard manufacturing costs only to product. Whereas, some cost such as administrative expenses...
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...Costing is used in business accounting strategies as a way of determining the cost of manufacturing a product in relation to the revenue generated by that product. Costing systems determine the overhead of production and then allocate those overhead costs to a business’ products. There are two common methods for allocating these indirect costs to products. Both of these methods assess overhead costs and then attach these costs to products based on certain cost drivers. A cost driver is any component that costs money or any factor that is related to a cost occurring, such as the volume produced or the number of labour hours. The first of these methods is activity-based costing, which is sometimes referred to as “ABC.” Activity-based costing determines all activities associated with production, assigns a cost to those activities and then determines the cost of the product. The other method is traditional costing, which assigns costs to products based on an average overhead rate. This method pools all indirect costs in production and applies those costs equally across the board using one appropriate cost driver, such as machine hours. Comparison between ABC and traditional costing Activity-based costing is more accurate because it takes important factors into account before assigning a cost to a product. However, for this same reason, it is a bit more complicated and time-consuming. It’s also more thorough and considers non manufacturing expenses as well, such as administrative...
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...How Activity Based Costing differs from Conventional Costing Introduction Costing is used in business as a way of determining the cost of manufacturing/offering a product/service. Costing systems determine the overhead (indirect) cost of production and then allocate those overhead costs to a business’ products or services offered. There are two common methods for allocating these indirect costs to products. Activity Based Costing (sometimes referred to as “ABC” Costing) and Traditional Costing. Both these methods assess overhead costs and then attach these costs to products based on certain cost drivers. A cost driver is any component that costs money or any factor that is related to a cost occurring, such as the volume produced or the number of labor hours. Without going into the hard hitting mechanics of how ABS and/or Standard Costing works, this assignment will cover the key differences on how each costing system differs. Time is money Activity-based costing is more accurate with increased benefits because it takes important factors into account before assigning a cost to a product. However, for this same reason, it is a bit more complicated and time-consuming. It's also more thorough and considers nonmanufacturing expenses as well, such as administrative and managerial costs. source :cfo.com Traditional costing is a much easier way of determining the cost of a product, since it relies solely on assigning average overhead rates. This also means it won’t always...
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...The first factor is costing. Costing concerns setting a price for a product or service so that a profit is made and arriving at a correct valuation for stock. (Jones, 2012). The reason why cost are used in many different ways is to fulfil the need of management according to their department. For example, for the purpose of accounting for costs in manufacturing companies, cost are classified into two divisions which are manufacturing costs and non-manufacturing cost. Manufacturing cost consist of direct materials, direct labour and manufacturing overhead while non-manufacturing costs consist of selling costs and administrative cost. Another example is for the purpose of preparing financial statements, costs are classified into product costs and period costs. Tools and techniques that used to drive costing factor are absorption costing and activity based costing. Absorption costing is the method under which all manufacturing costs, both variable and fixed, are treated as product costs with non-manufacturing costs, for example, selling and administrative expenses, being treated as period costs. Absorption costing treats all manufacturing cost as product costs, regardless of whether they are variable or fixed. The cost of a unit of product under the absorption costing method consists of direct materials, direct labor, and both variable and fixed manufacturing overhead. Thus, absorption costing allocates a portion of fixed manufacturing overhead cost to each unit of...
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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 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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................................ 4 Action and Implementation Plan ................................................................................................... 5 Outcome Measure Specification ................................................................................................... 7 Textbook Questions ...................................................................................................................... 7 Appendix ....................................................................................................................................... 9 Exhibit 1. Net income in traditional and ABC systems. .................................................................. 12 Exhibit 2. Cost per unit based on ABC method ............................................................................... 13 Exhibit 3. Recommended Selling Prices with 35% Gross Margin ................................................ 14 Bibliography ................................................................................................................................ 14 1 Executive Summary Destin Brass, a company which specializes...
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...STUDY, DISCUSS THE IMPORTANCE AND APPLICATION OF COSTING TECHNIQUES IN HOSPITALITY INDUSTRY IN NIGERIA? (CASE STUDY OF YANKARI MASS TRANSIT CORPORATION) By Nwankwo Stephen c. TABLE OF CONTENTS 1.0 INTRODUCTION 1.1 Background of the assignment 1.2 Purpose/objectives of the assignment 1.3 Definition of the term 1.4 Historical background of the case study ABSTRACT The aim of the assignment is to find out the importance of using costing techniques such as operating costing, standard costing, direct costing, absorption costing etc. in one of the sub-sector of Nigerian economy(hospitality). And also to identify the techniques adopted by the hospitality industry and it’s important to the organization. INTRODUCTION 1.1 BACKGROUND OF THE ASSIGNMENT The hospitality industry is a broad category of fields within the service industry that include lodging, transportation, and additional fields within the tourism industry. Since the introduction of money, people have been concerned with cost. They think of how to manage money. Costing system was first recognized in manufacturing industries with the aim of finding the cost of production or cost of a product, presently, the system is used very widely in other establishments such as transport companies, schools, governmental organizations, hospitals, banks, etc. these examples includes both profit making and non-profit making...
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...Tutorial 5 Q1 Describe the shortcomings of traditional approaches to overhead cost analysis. A traditional approach is a costing method that is used to allocate manufacturing costs to specific products. It uses single cost driver such as machine hours, direct labour hours to allocate indirect manufacturing costs. Traditional costing approaches can referred as the conventional method. However, there are many cost drivers in reality when factory overhead occurred, such as machines setups, or inspections. Since it missed out the others cost driver, it may fail to identify opportunities for cost efficiency, or allocate inaccurate per-unit cost, subsequently will results the managers unable to make a clear and strategic decision during costing. Nevertheless, traditional costing approaches also may not take into account consumer demand or unique features of product; it might reduce the improvements of the organization. Even though traditional approaches may easy to apply in each size of manufacturing business, yet it will become less reliable due to increased in the level of diversity of output rises and the level of complicated of manufacturing project. For example, if a business that has a lot of overhead expenses, it needs a more reliable and accurate costing approaches to identify or allocate the overhead costs to different products. If the costs and prices allocated incorrectly will causes the competitive position affected. Manufacturing environment has tried hard to find...
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...ACCOUNTING COSTING AND BUDGETING. HND IN BUSSINESS MANGMENT Indivdual Assigment [Ilzam Ilyas/BM43/09] Executive Summery This report describes Managing accounting costing and budgeting to an organization of both current and future business. Effective information and knowledge can be gained by an organization if they have a clear understanding about their costing and budgeting flow. There are four learning outcomes that have been talked in this report. The learning outcome 1 speaks about the types of costing that organization has to bear and it shows with the relevant examples. It also calculates cost and the price and found the net profit of the given statement using different costing methods. The learning outcome 3 explains the purpose of budgeting advantages and disadvantages and some other types of budgets and calculated the cash budget statement of the company. Further, in learning outcome 2 and 4 of the assignment, the way company “Cosmo” that makes and sell products is clearly described using variance as its method of controlling and coordinating their labors. Moreover, existing approach of Variance by the “Cosmo” organization has highlighted with the recommendation to improve their performance next year with all the calculations process is identified and discussed. Acknowledgment "I would like to thank our Management Accounting Costing and Budgeting...
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...[pic] Managerial Accounting BA3201 |Puganeswary Thirumalai Naidu |307254805 |BABHM | |Tan Lian Ping |11001200428010 |BABHM | |Yasmin Lim Binti Mohd.Arifin |307147803 |BBA MKT | |Herry Abubakar Mshihiri |609687502 |BBA IB | Question1 | |Task 1 : Sales and Labour Budgets : University | | | | | | | | | |1 (a) | | | | | ...
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...Process costing (a) Describe the characteristics of process costing (b) Describe situations where the use of process costing would be appropriate (c) Calculate the cost per unit of process outputs (d) Explain the concepts of 'normal and abnormal' losses and 'abnormal' gains (e) Prepare process accounts, involving normal and abnormal losses and abnormal gains (f) Calculate and explain the concept of equivalent units (g) Apportion process costs between work remaining in process and transfers out of a process using the weighted average and FIFO methods (h) Prepare process accounts in situations where work remains incomplete (i) Prepare process accounts where losses and gains are identified at different stages of the process The basics of process costing Process costing is a costing method used where it is not possible to identify separate units of production, or jobs, usually because of the continuous nature of the production processes involved. It is common to identify process costing with continuous production such as the following. • Oil refining • Foods and drinks • Paper • Chemicals Process costing may also be associated with the continuous production of large volumes of low-cost items, such as cans or tins. Features of process costing (a) The output of one process becomes the input to the next until the finished product is made in the final process. (b) The continuous nature of production in many processes means that there will...
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