Download - Marginal Absorption
-
8/3/2019 Marginal Absorption
1/24
Variable Costing: ATool for Management
-
8/3/2019 Marginal Absorption
2/24
The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin
Absorption Costing
Treats all manufacturing costs as productcosts, and non-manufacturing costs as period
costsUnit costs consist of direct material and directlabor and both variable and fixedmanufacturing overhead.
Fixed manufacturing overhead is allocated toeach unit of production
-
8/3/2019 Marginal Absorption
3/24
-
8/3/2019 Marginal Absorption
4/24
The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin
Overview of Absorption andVariable Costing
Direct Materials
Direct Labor
Variable Manufacturing Overhead
Fixed Manufacturing Overhead
Variable Selling and Administrative Expenses
Fixed Selling and Administrative Expenses
VariableCosting
AbsorptionCosting
ProductCosts
PeriodCosts
ProductCosts
PeriodCosts
-
8/3/2019 Marginal Absorption
5/24
The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin
Q uick Check
W hich method will produce the highest valuesfor work in process and finished goodsinventories?a. Absorption costing.b. Variable costing.c. They produce the same values for these
inventories.d. It depends. . .
-
8/3/2019 Marginal Absorption
6/24
The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin
W hich method will produce the highest valuesfor work in process and finished goodsinventories?a. Absorption costingb. Variable costing.c. They produce the same values for these
inventories.d. It depends. . .
Q uick Check
-
8/3/2019 Marginal Absorption
7/24
The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin
Q uick Check
W hich method will produce the highest retainedearnings? (Hint: Remember the balance sheetequation.)a. Absorption costingb. Variable costingc. There would be no difference in retained
earnings under the two methods.d. It depends ...
-
8/3/2019 Marginal Absorption
8/24
The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin
W hich method will produce the highest retainedearnings? (Hint: Remember the balance sheet
equation.)a. Absorption costing, because some fixed costs stay
in inventory until the product is soldb. Variable costing
c. There would be no difference in retainedearnings under the two methods.d. It depends ...
Q uick Check
Assets = Liabilities + Owners Equityo o
-
8/3/2019 Marginal Absorption
9/24
The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin
Harvey Co. produces a single product withthe following information available:
Unit Cost Computations
-
8/3/2019 Marginal Absorption
10/24
The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin
U nit product cost is determined as follows:
Selling and administrative expenses arealways treated as period expenses and
deducted from revenue.
Unit Cost Computations
-
8/3/2019 Marginal Absorption
11/24
The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin
A bsorption CostingSales (20,000 $30) 600,000$Less cost of goods sold:
Beginning inventory -$A dd COGM (25,000 $16 ) 400,000 Goods available for sale 400,000 Ending inventory (5,000 $16 ) 80,000 320,000
Gross margin 280,000 Less selling & admin. exp.
VariableFixed
Net operating income
Harvey Co. had no beginning inventory, produced25,000 units and sold 20,000 units this year.
Income Comparison of Absorption and Variable Costing
-
8/3/2019 Marginal Absorption
12/24
The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin
Harvey Co. had no beginning inventory, produced25,000 units and sold 20,000 units this year.
A bsorption CostingSales (20,000 $30) 600,000$Less cost of goods sold:
Beginning inventory -$A dd COGM (25,000 $16 ) 400,000 Goods available for sale 400,000 Ending inventory (5,000 $16 ) 80,000 320,000
Gross margin 280,000 Less selling & admin. exp.
Variable (20,000 $3) 60,000$Fixed 100,000 160,000
Net operating income 120,000$
Income Comparison of Absorption and Variable Costing
-
8/3/2019 Marginal Absorption
13/24
The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin
Variable CostingSales (20,000 $30) 600,000$Less variable expenses:
Beginning inventory -$A dd COGM (25,000 $10 ) 250,000 Goods available for sale 250,000 Less ending inventory (5,000 $10 ) 50,000 Variable cost of goods sold 200,000 Variable selling & administrative
expenses (20,000 $3) 60,000 260,000 Contribution margin 340,000 Less fixed expenses:
Manufacturing overhead 150,000$Selling & administrative expenses 100,000 250,000
Net operating income 90,000$
N ow lets look at variable costing by Harvey Co.Variable
costsonly.
A ll fixedmanufacturing
overhead isexpensed.
Income Comparison of Absorption and Variable Costing
-
8/3/2019 Marginal Absorption
14/24
The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin
Q uick Check The net operating income under absorption
costing was $120,000 and under variablecosting it was $90,000 because of higher expenses. W here is the missing $30,000 under absorption costing?a. It has disappeared into an accounting black
hole.
b. It is in ending inventories.c. It represents taxes that have been saved.d. The $30,000 wasnt a real cost, so nothing
is really missing.
-
8/3/2019 Marginal Absorption
15/24
The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin
The net operating income under absorptioncosting was $120,000 and under variablecosting it was $90,000 because of higher expenses. W here is the missing $30,000 under absorption costing?a. It has disappeared into an accounting black
hole.
b. It is in ending inventories.c. It represents taxes that have been saved.d. The $30,000 wasnt a real cost, so nothing
is really missing.
Q uick Check
-
8/3/2019 Marginal Absorption
16/24
The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin
Lets compare the methods.
Income Comparison of Absorption and Variable Costing
-
8/3/2019 Marginal Absorption
17/24
The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin
Reconciliation
Variable costing net operating income 90,000$Add: Fixed mfg. overhead costs
deferred in inventory(5,000 units $6 per unit) 30,000
Absorption costing net operating income 120,000$
Fixed mfg. overhead $150,000U nits produced 25,000 units= = $6.00 per unit
We can reconcile the difference betweenabsorption and variable income as follows:
-
8/3/2019 Marginal Absorption
18/24
The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin
Harvey Co. Year 2
In its second year of operations, Harvey Co.started with an inventory of 5,000 units,
produced 25,000 units and sold 30,000 units.
-
8/3/2019 Marginal Absorption
19/24
The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin
Harvey Co. Year 2
Unit product cost is determined as follows:
No change in Harveyscost structure.
-
8/3/2019 Marginal Absorption
20/24
The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin
A bsorption CostingSales (30,000 $30) 900,000$Less cost of goods sold:
Beg. inventory (5,000 $16 ) 80,000$
A dd COGM (25,000 $16 ) 400,000 Goods available for sale 480,000 Less ending inventory - 480,000
Gross margin 420,000 Less selling & admin. exp.
Variable (30,000 $3) 90,000$Fixed 100,000 190,000 Net operating income 230,000$
Harvey Co. Year 2
T hese are the 25,000 unitsproduced in the current period.
-
8/3/2019 Marginal Absorption
21/24
The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin
Harvey Co. Year 2Variable
costsonly.
A ll fixedmanufacturingoverhead isexpensed.
-
8/3/2019 Marginal Absorption
22/24
The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin
Reconciliation
Variable costing net operating income 260,000$Deduct: Fixed manufacturing overheadcosts released from inventory
(5,000 units $6 per unit) 30,000A bsorption costing net operating income 230,000$
We can reconcile the difference betweenabsorption and variable income as follows:
Fixed mfg. overhead $150,000U nits produced 25,000 units= = $6.00 per unit
-
8/3/2019 Marginal Absorption
23/24
The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin
Summary
-
8/3/2019 Marginal Absorption
24/24
The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin
Comparative Income Effects
Production = SalesN o change in inventory; income the same for both absorption and variable costing
Production > SalesInventories increase; Absorption Incomehigher than Variable Cost income due tomore fixed cost retained in inventory
Production < SalesInventories decrease; Absorption Incomelower than Variable Cost income as morefixed costs are released from inventory