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Cost Management

Cost Management. Session 7. Overview. Theory Exercise: 10.33, 10.37, 10.56, 10.60. Theory. Absorption Costing. This costs method includes allocating direct material, direct labor, and both variable and fixed manufacturing overhead to the costs of production

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Cost Management

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  1. Cost Management Session 7

  2. Overview • Theory • Exercise: 10.33, 10.37, 10.56, 10.60

  3. Theory AbsorptionCosting 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.

  4. 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.

  5. Throughput costing Is a costing method that assigns only the out-of-pocket spending as the cost of products or services. Out-of-pocket costs are costs requiring cash payments in the current accounting period.

  6. Exercise 10.33 • Compute the amount that overhead was over-applied or under-applied.

  7. Predetermined overhead rate Applied overhead Overhead variance

  8. Should this variance be closed to Cost of sales?

  9. 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

  10. Exercise 10.37 • Compute the standard accrual product cost per container of ketchup under (1) absorption costing and (2) variable costing

  11. Since there were no variances in 20x0, actual production and budgeted production must have been the same.

  12. b) Prepare a statement of income for 20x0 using (1)absorption costing and variable costing

  13. (1)Absorption costing

  14. (2) Variable costing

  15. c) Reconcile the income reported under the two methods

  16. Cost of sales under absorption costing kr 10,500,000 Less: 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)

  17. 10.56 a) Prepare a variable-costing statement of income for the year.

  18. 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 absorption-costing statement of income.

  19. 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.

  20. 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.

  21. Total cost: Direct material (10,000 units x $12) $ 120,000 Direct labour $ 45,000 Variable manufacturing overhead $ 65,000 Fixed manufacturing overhead $ 220,000 Variable selling and administrative costs (9,600 units x $8) $ 76,800 Fixed selling and administrative costs $ 118,000 Total $644,800

  22. b) How much of this cost would be held in year-end inventory under (1) absorption costing, (2) variable costing, and (3) throughput costing.

  23. The cost of the year-end inventory of 400 units (10,000 units produced – 9,600 units sold) is computed as follows:

  24. 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?

  25. d) Prepare the company’s throughput-costing statement of income.

  26. Net income = sales revenue - all costs expenses = $768,000 - $640,000 ([from req. (c)] = $128,000

  27. READY FOR TEST?

  28. See you next week!

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