Chapter 14 Measuring and Assigning Costs for Income Statements Key Topics: Absorption costing Variable costing Throughput costing Reconciling income Actual versus normal costing Uses and limitations of costing information

Absorption Costing

Absorption Costing Income Statement

Variable Costing

Variable Costing Income Statement

Throughput Costing

Throughput Costing Income Statement

Asian Iron Production:10,500 units Sales: 9,400 units at NT$32,900 Variable direct materials cost: NT$2,300 Variable direct labor cost: NT$3,300 Variable manufacturing overhead: NT$2,800 Variable selling: NT$940 Fixed manufacturing overhead: NT$8,250 Fixed selling and administrative costs: NT$14,560

Asian Iron Prepare each of the following income statements: Absorption Variable Throughput

Reconciling the Income Statements To reconcile income: Analyze changes in inventory levels Absorption costing inventory includes overhead allocation Variable costing inventory includes only variable costs Throughput costing inventory includes only direct materials

Reconciling the Income Statements for Asian Iron Assume there is no beginning inventory and calculate: Ending inventory amounts under the absorption, variable, and throughput methods A reconciliation of variable and throughput income to absorption income

Actual versus Normal Costing Actual allocation rate = Actual overhead/Actual volume Normal allocation rate = Estimated overhead/Estimated volume Normal costing requires end of period adjustment: Volume variance = Expected overhead - allocated overhead

Happy Bikers Motorcycle Company Following is information about operations at Happy Bikers. Price and variable cost information is per unit. Price is $10,000, raw materials cost is $2,000, direct labor and variable overhead is $1,000, variable selling and administration is $250. Fixed costs are per month and include $40,000 for production costs and $35,000 for fixed selling and administration. There is no beginning inventory, average production is 10 motorcycles per month, but last month 18 units were produced and 15 were sold. For absorption costing, Happy Bikers’ accountants use normal costing with 10 units as the volume denominator.

Happy Bikers Motorcycle Company Prepare an absorption costing income statement for Happy Bikers using actual costing. Prepare an absorption costing income statement using normal costing. Reconcile the actual and normal income statements. For the beginning of the next class: Prepare a variable costing income statement for Happy Bikers. Prepare a throughput costing income statement for Happy Bikers. Reconciles the variable and throughput costing income statements to the absorption costing statement using normal costing.

Uses and Limitations of Costing Information Absorption costing information is GAAP, and includes average costs so it is not appropriate for decision making Variable costing is not GAAP but is useful for decision making Throughput costing is not GAAP but is useful for short-term capacity decision making