We think you have liked this presentation. If you wish to download it, please recommend it to your friends in any social system. Share buttons are a little bit lower. Thank you!
Presentation is loading. Please wait.
Published byAmira Cush
Modified over 2 years ago
© 2012 Pearson Prentice Hall. All rights reserved.9-1 Variable and absorption costing, explaining operating- income differences Nascar Motors assembles and sells motor vehicles and uses standard costing. Actual data relating to April and May 2011 are: Exercise 9-16
© 2012 Pearson Prentice Hall. All rights reserved.9-2 The selling price per vehicle is $24,000. The budgeted level of production used to calculate the budgeted fixed manufacturing cost per unit is 500 units. There are no price, efficiency, or spending variances. Any production-volume variance is written off to cost of goods sold in the month in which it occurs. The following information is available:
© 2012 Pearson Prentice Hall. All rights reserved Prepare April and May 2011 income statements for Nascar Motors under: (a) variable costing (b) absorption costing
© 2012 Pearson Prentice Hall. All rights reserved.9-4 (a) variable costing
© 2012 Pearson Prentice Hall. All rights reserved.9-5 (b) absorption costing
© 2012 Pearson Prentice Hall. All rights reserved Prepare a numerical reconciliation and explanation of the difference between operating income for each month under variable costing and absorption costing. The difference between absorption and variable costing is due solely to moving fixed manufacturing costs into inventories as inventories increase (as in April) and out of inventories as they decrease (as in May).
Pr Continued from April 2011May 2011 Revenues a $8,400,000 $12,480,000 Direct material cost of goods sold Beginning inventory Direct materials in goods manufactured b $ 0 3,350,000 $1,005,000 2,680,000 Cost of goods available for sale Deduct ending inventory c 3,350,000 (1,005,000) 3,685,000 (201,000) Total direct material cost of goods sold Throughput margin Other costs 2,345,000 6,055,000 3,484,000 8,996,000 Manufacturing costs3,650,000 d 3,320,000 e Other operating costs 1,650,000 f 2,160,000 g Total other costs Operating income 5,300,000 $ 755,000 5,480,000 $ 3,516,000 © 2012 Pearson Prentice Hall. All rights reserved.9-7
Pr Concluded © 2012 Pearson Prentice Hall. All rights reserved.9-8 AprilMay Variable costing Absorption costing Throughput costing $1,250,000 1,850, ,000 $3,120,000 2,640,000 3,516, In April, throughput costing has the lower operating income, and in May throughput costing has the higher income. Throughput costing puts greater emphasis on sales as the source of operating income than does either absorption or variable costing. 3.Throughput costing penalizes production without a corresponding sale in the same period. Costs other than direct materials that are variable with respect to production are expensed in the period incurred, but under variable costing they would be capitalized. So, TP costing removes the incentive to build up inventory.
Denominator Level Concepts © 2012 Pearson Prentice Hall. All rights reserved.9-9
9-26--Denominator Level Issues © 2012 Pearson Prentice Hall. All rights reserved.9-10 Denominator Level Capacity Concept Budgeted Fixed Manufacturing Overhead per Period Budgeted Capacity Level Budgeted Fixed Manufacturing Overhead Cost Rate Theoretical $ 6,480,000 5,400 $ 1, Practical $6,480,000 3,840 $1, Normal $6,480,000 3,240 $2, Master-budget $6,480,000 3,600 $1, The variances that arise from use of the theoretical or practical level concepts will signal that there is a divergence between the supply of capacity and the demand for capacity. This is useful input to managers. As a general rule, however, it is important not to place undue reliance on the production volume variance as a measure of the economic costs of unused capacity.
Master Budget as Level? © 2012 Pearson Prentice Hall. All rights reserved.9-11 Will lead to high prices when demand is low (more fixed costs allocated to the individual product level), further eroding demand; and to low prices when demand is high, forgoing profits. –This is the downward demand spiralthe continuing reduction in demand that occurs when the prices of competitors are not met and demand drops, resulting in even higher unit costs and even more reluctance to meet the prices of competitors. The positive aspects: –based on demand for the product and indicates the price at which all costs per unit would be recovered to enable the company to make a profit. –is also a good benchmark against which to evaluate performance.
9-32 Alternative denominator-level capacity concepts, effect on operating income Budgeted Fixed Days ofHours of BudgetedManufacturing Denominator-Level Capacity Concept Manuf. Overhead per Period Production per Period Production per Day Barrels per Hour Denominator Level (Barrels) Overhead Rate per Barrel (1)(2)(3)(4)(5) =2 x 3 x 4(6) = (1)/ (5) Theoretical capacity$28,000, ,665,600$ 6.00 Practical capacity 28,000, ,500, Normal capacity utilization 28,000, ,800, Master-budget utilization (a) January-June ,000, ,120, (b) July-December ,000, ,680, © 2012 Pearson Prentice Hall. All rights reserved.9-12 The theoretical and practical capacity concepts emphasize supply factors and are consequently higher, while normal capacity utilization and master- budget utilization emphasize demand factors. The two separate six-month rates for the master-budget utilization concept differ because of seasonal differences in budgeted production.
9-32 Resulting Volume Variance © 2012 Pearson Prentice Hall. All rights reserved.9-13 Per Barrel Denominator-Level Capacity Concept Budgeted Fixed Mfg. Overhead Rate per Barrel (6) Budgeted Variable Mfg. Cost Rate (7) Budgeted Total Mfg Cost Rate (8) = (6) + (7) Fixed Mfg. Overhead Costs Allocated (9) = 2,600,000 (6) Fixed Mfg. Overhead Variance (10) = $27,088,000 – (9) Theoretical capacity$6.00 $30.20 a $36.20 $15,600,000$11,488,000U Practical capacity ,800,000 6,288,000U Normal capacity utilization ,000,000 1,088,000U
9-32 Resulting Income © 2012 Pearson Prentice Hall. All rights reserved.9-14 Theoretical Capacity Practical Capacity Normal Capacity Utilization Revenues (2,400,000 bbls. $45 per bbl.)$108,000,000 Cost of goods sold Beginning inventory000 Variable mfg. costs78,520,000 Fixed mfg. overhead costs allocated (2,600,000 units $6.00; $8.00; $10.00 per unit) 15,600,000 20,800,000 26,000,000 Cost of goods available for sale94,120,00099,320, ,520,000 Deduct ending inventory (200,000 units $36.20; $38.20; $40.20 per unit)(7,240,000)(7,640,000)(8,040,000) Adjustment for variances (add: all unfavorable) 11,488,000U 6,288,000U 1,088,000U Cost of goods sold 98,368,000 97,968,000 97,568,000 Gross margin9,632,00010,032,00010,432,000 Other costs Operating income$ 9,632,000$ 10,032,000$ 10,432,000 Pr. 9-33: Discuss Motivational Considerations
© 2012 Pearson Prentice Hall. All rights reserved.9-15
1 Costing 2 Accounting Prof. Clive Vlieland-Boddy Academic Year
8 - 1 ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Flexible Budgets, Variances, and Management Control: II Chapter.
Chapter 7 Differential Cost Analysis (aka Incremental Analysis) for Operating Decisions.
6 - 1 ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Chapter 6 Master Budget and Responsibility Accounting.
Chapter 22. Prepare a flexible budget for the income statement.
1. 2 * Topic 3.4 (HL) 3 Introduction * A budget is a financial plan for expected revenue and expenditure for an organization or a department within.
Chapter Chapter 15-2 CHAPTER 15 JOB ORDER COSTING JOB ORDER COSTING Accounting, Fourth Edition.
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Decision Making and Relevant Information Chapter 11.
McGraw-Hill/Irwin Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. Standard Costs: Direct Labor and Materials Chapter Twelve.
PowerPoint Authors: Susan Coomer Galbreath, Ph.D., CPA Charles W. Caldwell, D.B.A., CMA Jon A. Booker, Ph.D., CPA, CIA Cynthia J. Rooney, Ph.D., CPA Copyright.
8-1 Copyright © 2004 by Nelson, a division of Thomson Canada Limited. Variable Costing: Segmented Reporting and Performance Evaluation 8 PowerPresentation®
1 Intro to Management Accounting Understanding Costs Week 6.
Introduction to Management Accounting: The Master Budget Chapter 20 HORNGREN ♦ HARRISON ♦ BAMBER ♦ BEST ♦ FRASER ♦ WILLETT.
. Copyright 2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 29-1 Chapter 29 Further consolidation issues.
Chapter 4 Supply Contracts Introduction Significant level of outsourcing Many leading brand OEMs outsource complete manufacturing and design of.
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Job Order Costing Chapter 4.
1 Costing 1 Dr. Clive Vlieland-Boddy FCA FCCA MBA.
Short-Run Decision Making; Relevant Costing and Inventory Management Management Accounting: The Cornerstone for Business Decisions Copyright ©2006 by South-Western,
Copyright © 2008, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin Systems Design: Job-Order Costing.
McGraw-Hill/Irwin© 2008 The McGraw-Hill Companies, Inc. All rights reserved. 13 Segment and Interim Reporting.
International Accounting Standard 33 Earnings per Share.
ACC 3200 Process Costing. Learning Objectives Describe the key features of a process costing system. Reconcile the number of physical units using the.
Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Chapter 17 1.
1 1 Accounting The Make up of Costs Dr Clive Vlieland-Boddy.
C H A P T E R 5 Operational Budgets. What are the Purposes of Budgeting ? OVERALL PURPOSE : To quantify a general plan so that performance in relation.
Managing Capacity. © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:
Conducted by: Mr. Koy Chumnith Cash and Receivables , Royal University of Law and Economics McGraw-Hill/Irwin.
Copyright © 2008, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin Chapter Three Systems Design: Job-Order Costing.
Demonstration Problem Chapter 5 – Problem 27 Cost Flow Assumptions – FIFO and LIFO Using Periodic and Perpetual Systems Accounting What the Numbers Mean.
1 Standard Costing and Variance Analysis February 6 th 2007.
© 2016 SlidePlayer.com Inc. All rights reserved.