Absorption and Variable Costing
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31 Terms
It is a product costing method that includes all the manufacturing costs (DM, DL, both VOH and FOH) in the cost of a unit of product
Absorption costing
It is a product costing method that includes only the variable manufacturing costs (DM, DL, and VOH) in the cost of a unit of product
Variable costing
When production equals to sales, the net income of Absorption Costing is _____________ than Variable Costing
Equal
When production greater than sales, the net income of Absorption Costing is _____________ than Variable Costing
greater
When production less than sales, the net income of Absorption Costing is _____________ than Variable Costing
less
It treats direct materials as the only variable costs
Supervariable Costing or Throughput Costing
It treats costs (value-adding) from all links in the value chain as inventoriable costs
Superabsorption costing
The ending inventory balance in units under absorption costing will always be equal than variable costing (T/F)
True
The ending inventory balance under absorption costing will always be higher than variable costing (T/F)
True
Other name of Variable Costing
Direct Costing
Other names of Absorption Costing
Conventional Costing
Full Costing
Under variable costing, it segregates the cost according to ______
behavior
Under Absorption Costing, it segregates the cost according to _____
function
Revenue Driver under Variable Costing
Unit Level of Sales
Revenue Driver under Absorption Costing
Unit level of sales
Unit level of production
Chosen denominator level
Performance Issues of Absorption Costing
Producing too many units results in more fixed costs being capitalized as inventory. Profit increases, and potentially, so does a manager’s bonus.
Employees choose to manufacture products that absorb the highest amount of fixed costs, regardless of demand (Cherry-Picking)
Accepting an order to increase production
Management Countermeasures for Fixed Cost Manipulation Schemes
Base manager’s bonuses on profit calculated using variable costing
Lengthen the period used to evaluate performance
Careful budgeting and inventory planning
Incorporate an internal carrying charge for inventory
Include nonfinancial as well as financial variables in performance evaluation
Basis of period cost:
With term “Selling”
Variable Period Cost / Unit Sold
Basis of period cost:
No term “Selling”
Variable Period Cost / Units Produced
The results of EA Company for the current production period is as follows:
Unit Produced 5,000
Units Sold 4,000
How much is the period cost if the variable selling and administrative is P20,000; or Variable Selling, P20k; or Variable Admin, P20k?
20,000
Since the total amount is given, the entire P20K will be charged against revenues because it is a period cost and can never be prorated between sales units and ending inventory
The results of EA Company for the current production period is as follows:
Unit Produced 5,000
Units Sold 4,000
How much is the period cost if the variable selling per unit is P4?
P16,000 (4k x P4)
The results of EA Company for the current production period is as follows:
Unit Produced 5,000
Units Sold 4,000
How much is the period cost if the selling and admin per unit is P4?
P16,000 (4k x P4) “Selling = Sold”
The results of EA Company for the current production period is as follows:
Unit Produced 5,000
Units Sold 4,000
How much is the period cost if the variable administrative is P4?
P20,000
Since Administrative expense is incurred first before selling.
In case the company is labor intensive what should be the cost driver in allocating fixed overhead?
Labor hours or labor cost
In case the company is capital intensive what should be the cost driver in allocating fixed overhead?
Machine hours
The Four Cost Systems
Actual Cost System
Normal Cost System
Extended Normal Cost System or Flexible Budget
Standard Cost System or Static Budget
Actual Cost System
AP X AQ for Materials, Labor, and Overhead
Normal Cost System
AP x AQ for Materials and Labor
SP x AQ for Overhead
Extended Normal Cost System or Flexible Budget
SP x AQ for Materials, Labor, and Overhead
Standard Cost System or Static Budget
SP x SQ for Materials, Labor, and Overhead