Transcript Cost Management

Cost Management
Session 7
Overview
• Theory
• Exercise: 10.33, 10.37, 10.56, 10.60
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Theory
Absorption Costing
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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Variable (direct) costing
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.
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Throughput costing
Is a costing method that assigns only the out-ofpocket spending as the cost of products or services.
Out-of-pocket costs are costs requiring cash
payments in the current accounting period.
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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
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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
=
budgeted fixed overhead
budgeted production
kr2,100,000
150,000
=
kr 14 per unit
Direct material
kr 35
Direct labor
14
Variable overhead
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Standard cost per unit under variable costing
kr 70
Fixed overhead per unit under absorption
costing
Standard cost per unit under absorption
costing
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kr 84
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b) Prepare a statement of income for 20x0 using
(1)absorption costing and variable costing
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(1)Absorption costing
Revenue
Less: Cost of sales
Cost of sales
Kr 14,000,000
Gross margin
Less: Selling and Adm. expenses
Kr 3,500,000
Fixed
Kr 350,000
Variable
Kr 875,000
Net Income
Kr 2,275,000
Kr 10,500,000
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(2) Variable costing
Revenue
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
Less:
kr 10,500,000
Variable manufacturing costs under variable costing
kr 8,750,000
Difference
kr 1,750,000
Less:Fixed manufacturing overhead as period expense
under 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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€465,000
Revenue
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 margin
Fixed manufacturing costs (€315,000 x 30%)
208,480
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
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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 absorptioncosting 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)
Direct labour
Variable manufacturing overhead
Fixed manufacturing overhead
Variable selling and administrative
costs (9,600 units x $8)
Fixed selling and administrative costs
$
$
$
$
120,000
45,000
65,000
220,000
Total
$644,800
$ 76,800
$ 118,000
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b) How much of this cost would be held in yearend inventory under (1) absorption costing,
(2) variable costing, and (3) throughput
costing.
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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:
Direct material
Direct labour
Variable
manufacturing
overhead
Fixed
Manufacturing
overhead
Total product cost
(1)
Absorption
Costing
(2)
Variable
Costing
(3)
Throughput
Costing
$120,000
$120,000
$120,000
45,000
45,000
-
65,000
65,000
-
220,000
-
-
$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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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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Cost of sales
(1)
Absorption
Costing
$432,000
Direct material
$220,800
(3)
Throughput
Costing
$115,200
Direct labour
$45,000
Variabele
manufacturing
overhead
Fixed manufacturing
overhead
Variable selling
and adm. costs
Fixed seeling and
adm.costs
$65,000
Total
$220,000
$220,000
$76,800
$76,800
$76,800
$118,000
$118,000
$118,000
$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
Net income
$524,800
$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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