Chapter 8 Inventory Costing Created by Amzy R

Chapter 8 Inventory Costing Created by Amzy R. Nirvana

209 Inventory Costing Method An old adage in management accounting recommends, “different costs for different purpose. ” Costs are developed and used for some specific purpose. The way the cost is to be used will define the way it should be computed. thailandaccount. com accthai. wordpress. com 3

209 Inventory Costing Method Absorption Costing Variable Costing Throughput Costing (Super-Variable Costing) Actual Cost thailandaccount. com Standard Cost accthai. wordpress. com 4

209 Absorption Costing Uses Actual Cost • Product costs is reported using traditional income statement. • Costs on income statement are separated into two major categories. Product costs (cost of goods sold) and Period costs (operating expenses) thailandaccount. com accthai. wordpress. com 5

210 Example: The company produces and sells a single product. Absorption Costing Uses Actual Cost The following actual results on the company for year 1 and 2 are available: Variable production costs per unit(1) Fixed production costs per year (2) Units produced (3) Units sold (4) Selling price per unit (5) Year 1 10 600, 000 10, 000 2, 000 100 Year 2 10 600, 000 2, 000 100 Baht Units Baht There are no beginning inventories in year 1 Fixed production cost per unit (6) = (2) / (3) 60 300 Baht and assume that there are no operating expenses. 70 310 Baht Production cost per unit (7) = (1) + (6) thailandaccount. com accthai. wordpress. com 6

210 Absorption Costing Uses Actual Cost Year 1 10, 000 2, 000 100 70 Year 2 2, 000 100 310 Units produced(3) Units sold(4) Units Selling price per unit(5) Baht Production cost per unit(7) Baht Income Statement Sales (4)×(5) 200, 000 1, 000 Baht Less Cost of goods sold 140, 000 1, 180, 000 Baht Ending. Net inventories in Year 2, 000) 8, 000 units @(180, 000) ฿ 70 = 560, 000 (4) ×– (7) = 2, 000 × 70 income )loss ( 1 (10, 000 Baht 60, 000 Units produced in Year 2 = 2, 000 units @ ฿ 310 = 620, 000 Baht Units sold in year 2 Cost increase to 5 Sold times=of 560, 000 year 1, +but loss in= year 2. ? ? ? ? of Goods 620, 000 1, 180, 000 Baht thailandaccount. com accthai. wordpress. com 7

211 Contribution Margin Income Statement Sales Less Variable production costs Contribution margin Less Fixed manufacturing overheads Net income )loss ( Year 1 Year 2 200, 000 1, 000 Baht 20, 000 100, 000 2, 000 × 10 10, 000 × 10 180, 000 900, 000 600, 000 (420, 000) 300, 000 Baht in Year 1 = 2, 000 ฿ 100 as anda Year 2 =cost, 10, 000 @ ฿ 100 Only. Sales variable production costsunits are@treated product fixedunits manufacturing Variable costs 10 perisunit overhead costs are treated as production a period cost, this=฿method called Variable Costing. overheads 600, 000 per year as sales. Net income. Fixed usingmanufacturing Variable Costing varies in=฿the same direction thailandaccount. com accthai. wordpress. com 8

Absorption Costing DM DL VMO Financial Position Statement Income Statement Sales Inventories Cost of Goods Sold S&A Period Costs DM: Direct Materials DL: Direct Labors VMO: Variable Manufacturing Overheads FMO: Fixed Manufacturing Overheads S & A: Selling and Administrative Expenses thailandaccount. com accthai. wordpress. com 9

Variable Costing DM DL VMO Financial Position Statement Income Statement Sales Inventories Cost of Goods Sold FMO S&A Period Costs DM: Direct Materials DL: Direct Labors VMO: Variable Manufacturing Overheads FMO: Fixed Manufacturing Overheads S & A: Selling and Administrative Expense thailandaccount. com accthai. wordpress. com 10

Throughput Costing (Super-Variable Costing) DM Financial Position Statement Income Statement Sales Inventories Cost of Goods Sold DL VMO FMO S&A thailandaccount. com Period Costs accthai. wordpress. com 11

212 Inventory Costing Uses Standard Cost Selling price per unit 300 Baht Std. variable production cost per unit (DM 50, DL 15, VMO 20) 85 Baht Budgeted fixed manufacturing overhead per year 390, 000 Baht Normal capacity per year 6, 000 Units Budgeted operating cost = 300, 000 + 5% of Sales 2001 2002 2003 Production cost per unit Units Budgeted produced fixed manufacturing overhead per unit 6, 000 5, 200 = 390, 000 /6, 800 6, 000 = 65 Baht Units Absorption sold 6, 000 5, 800 6, 200 Costing = 85 + 65 = 150 Baht per unit Variable Costing = 85 Baht per unit Throughput Costing = 50 Baht per unit thailandaccount. com accthai. wordpress. com 12

213 Standard Absorption Costing Year Units produced Units sold 2001 6, 000 2002 6, 800 5, 800 2003 5, 200 6, 200 Sales 300) Baht per unit( 1, 800, 000 1, 740, 000 1, 860, 000 Cost of Goods Solld 150) Baht per unit( 900, 000 Units sold 870, 000 × 300 Baht 930, 000 Standard Gross Margin 900, 000 Units sold 870, 000 × 150 Baht 930, 000 Production volume variance -052, 000 (52, 000) Production volume variance = (units produced – 900, 000 normal capacity (× FMO per unit Gross margin after adjustment 922, 000 878, 000 Baht Operating expenses= (units produced– 6, 000 (× 65390, 000 From Previous 387, 000 393, 000 Slide It is the same as Chapter 7, 300, 000535, 000 + 5% of Sales 485, 000 Operating income 510, 000 thailandaccount. com 13 the different is that FMO rate accthai. wordpress. com are calculated in term of hours consumed.

213 Standard Absorption Costing Year Units produced Units sold Operating income 2001 6, 000 2002 6, 800 5, 800 2003 5, 200 6, 200 510, 000 535, 000 485, 000 Year 2003: The greatest sales, The least operating income ? ? Year 2002: The least sales, The greatest operating income ? ? The operating income has no relationship with sales incurred (instead it relates to units of production) because of fixed manufacturing overhead (which is shown in production variance). thailandaccount. com accthai. wordpress. com 14

213 Standard Variable Costing Year Units sold Sales) 300 Baht per unit( Variable costs Contribution margin Variable cost of goods sold Fixed costs expenses Variable operating Operation Total variable income costs 2001 6, 000 1, 800, 000 600, 000 1, 200, 000 510, 000 690, 000 510, 000 600, 000 2002 5, 800 1, 740, 000 580, 000 1, 160, 000 493, 000 690, 000 87, 000 470, 000 580, 000 2003 6, 200 1, 860, 000 620, 000 1, 240, 000 527, 000 690, 000 93, 000 550, 000 620, 000 ฿ 390, 000 fixed manufacturing 300, 000 of operating 85+฿Baht × Units sold Operating ofincome using Variable overheads Costing varies in the same directionexpenses as sales. Sales × 5% thailandaccount. com accthai. wordpress. com 15

215 Comparison of Absorption Costing and Variable Costing Year Units produced Units sold Difference Operating income – Absorption costing Operating income – Variable costing Difference thailandaccount. com 2001 6, 000 -0 - 2002 6, 800 5, 800 1, 000 2003 5, 200 6, 200 (1, 000) 510, 000 -0 - 535, 000 470, 000 65, 000 485, 000 550, 000 (65, 000) accthai. wordpress. com 16

215 Comparison of Absorption Costing and Variable Costing § Units produced = Units sold: Absorption Costing Operating Income is equal to Variable Costing Operating Income § Units produced > Units sold: Absorption Costing Operating Income is higher than Variable Costing Operating Income § Units produced < Units sold: Absorption Costing Operating Income is lower than Variable Costing Operating Income thailandaccount. com accthai. wordpress. com 17

216 Reconciling Income under Absorption and Variable Costing Operating income under Variable Costing Add FMO deferred in ending inventories under Absorption Costing Less FMO deferred in beginning inventories under Absorption Costing Operating income under Absorption Costing xx xx or Operating income under Absorption Costing Less FMO deferred in ending inventories on Absorption Costing Add FMO deferred in beginning inventories on Absorption Costing Operating income under Variable Costing xx xx thailandaccount. com accthai. wordpress. com 18

Standard Throughput Costing Year 2001 2002 2003 Units produced 6, 000 6, 800 5, 200 Units sold 6, 000 5, 800 6, 200 Sales) 300 Baht per unit( 1, 800, 000 1, 740, 000 1, 860, 000 300, 000 290, 000 310, 000 Cost of Goods Sold 50 Baht per unit × Units sold 1, 550, 000 1, 500, 000 1, 450, 000 Throughput Contribution Margin (50 Baht is Direct 1, 015, 000 Materials per unit( 990, 000 965, 000 Other Costs Conversion 600, 000 628, 000 572, 000 510, 000 435, 000 585, 000 Operating. Costs Income ฿)15 of DL + ฿ 20 of VMO (× Units produced + ฿ 390, 000 of FMO Operating Expenses 390, 000 387, 000 393, 000 ฿ 300, 000 + 5% of Sales Operating income using Variable Costing varies in the same direction as sales. Total Other Costs 990, 000 1, 015, 000 965, 000 thailandaccount. com accthai. wordpress. com 19

216 Reconciling Income under Absorption and Throughput Costing Operating income under Throughput Costing Add CC deferred in ending inventories on Absorption Costing Less CC deferred in beginning inventories on Absorption Costing Operating income under Absorption Costing xx xx or CC: Conversion Costs Operating income under Absorption Costing Less CC deferred in ending inventories on Absorption Costing Add CC deferred in beginning inventories on Absorption Costing Operating income under Throughput Costing xx xx thailandaccount. com accthai. wordpress. com 20

End of Chapter 8 The numbers in the top-left corner of slide refer to page numbers of this book )Management Accounting( thailandaccount. com accthai. wordpress. com 21