Mizzou Accounting 2037 Exam 2 - Wright

Absorption costing

A method of calculating the product cost where DM, DL and manufacturing OH are all included

When we use absorption costing, we can also say that DM, DL, and OH are ___, meaning they become our cost of inventory

inventoriable

Aborption costing ___ (is, is not) required by GAAP

is

Variable costing

A method of calculating product costs where DM, DL and variable manufacturing OH are included in the product. Fixed OH costs are considered a period cost and are not part of manufacturing inventory

Variable costing ___ (is, is not) allowed for GAAP

is not

How would you calculate production cost per unit under absorption costing

DM

DL

VOH

FOH

How would you calculate production cost per unit under variable costing

DM

DL

VOH

What sections do we think about when making an absorption costing income statement

manufacturing section and non-manufacturing section

What would an absorption costing income statement look like

Revenues

COGS

Gross profit

Other expenses

Net income

What sections do we think about when making a variable costing income statement

variable cost section and fixed cost section

What would an variable costing income statement look like

Revenues

Variable manu. costs

Contribution margin

Other expenses

Fixed OH

Net income

When making a variable costing income statement, how much do you put in Fixed OH

all of it

When would net income be the same for absorption costing and variable costing

if you sell all of the products that you produced

What causes the difference in net income for absorption and variable costing

fixed OH

Benefits of absorption costing

- Takes into account all manufacturing costs of production

- Compliant with GAAP

- More accurate picture of profitability

Major disadvantage of absorption costing

Only sends fixed manufacturing costs to the income statement when products are sold, so can incentivize the manager to overproduce to reduce fixed manufacturing costs that go to income statement during current reporting period

Benefits of variable costing

Shows incremental costs of production and treats fixed overhead costs as period costs, not dependent on how much is sold

Budgeting

coming up with expectations and plans about how our company will operate and compete

Another word for budget is:

standard

Why budget?

- Helps us quantify plans

- Helps us communicate the plan

- Creates motivation and ownership (if realistic)

- Allows benchmarking

- Compare to actual

- Performance management

The final step in budgeting is comparison to actual and determining ___ so we can adjust going forward

variances

Variances

The difference between what we thought was going to happen (the budget) and what actually happened

Why is variance analysis helpful

When we understand why our expectations were off, then we can make adjustments and to a better job of budgeting and implementing the budget in the future

What is step 1 of variance analysis

calculating the flex budget

Flex budget

recalculation of the budget using all budgeted (standard) information, except for units

Why do we create a flex budget

it strips out the fact that we didnt make/sell the same number of units as we planned, if we dont calculate this, part of the big difference between budget and actual is the difference in units. creating this lets us separate that from other causes

Variance analysis is separated into what 3 sections

- Budget variance

- Flex budget variance

- Sales volume variance

Flex budget variance consists of:

- selling price variance

- direct materials variances (DM price variance, DM efficiency variance)

- direct labor variances (DL price variance, DL efficiency variance)

What does DM variance ask

- did we have to pay more/less for direct materials

- did we use more/less of the materials than we thought per unit

What does DL variance ask

- did we have to pay more/less for direct labor

- did we use more/less of the labor than we thought per unit

When is a variance favorable

if the effect is that it increases operating income when compared to the budgeted amount

When is a variance unfavorable

if the effect is a decrease on operating income when compared to the budgeted amount

Why do we net variances together

to explain differences between budgeted and actual numbers

Responsibility accounting

A system of accountability in which managers are held responsible for those items of revenue and cost—and only those items—over which they can exert significant control. The managers are held responsible for differences between budgeted and actual results.

Common costs

costs of operating a facility, activity, or common cost object that is shared by two or more users

Methods to allocate common costs

stand alone method and incremental cost method

Stand alone method

determines the weights for cost allocation by using a pro-rata (%) method

Incremental cost method

ranks the individual users by which user is most responsible for the cost, and uses ranking to allocate costs

When using the incremental cost method, the First Ranked is the

Primary user

When using the incremental cost method, the Second Ranked is the

First Incremental user

Operating department

- Directly adds value to products/services

- Frequently interacts with customers

(Ex. marketing, accounting, management, and finance departments - They directly interact with students and generates tuition dollars)

Support department

- Provides services that assist other internal departments

- Necessary for the organization's success but do not create the end product on their own

(Ex. Advising, IT, HR do not generate tuition dollars but still cost money, they support the operating departments)

Methods for support department allocation

direct method, step-down method, reciprocal method

Which method do we use for support department allocation in this class

direct method

Direct method

allocates support department costs only to operating departments, not back to other support departments

Step-down method

allocates support-department costs to other support departments and to operating departments in a sequential manner that partially recognizes the mutual services provided among all support departments

Reciprocal method

fully allocates support department costs to other support departments, and then to other operating departments