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UNT ACCT 2020 - Variable Costing Vs Absorption Costing
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I. ReviewII. Steps To Variable CostingIII. ComparisonIV. Segment reportingV. Omission CostsVI. GAAPVII. ExamplesACCT 2020 1st Edition Lecture 10Outline of Last Lecture I. Traditional Costing Vs. Activity Based CostingII. Three Main Issues: Activity Based CostingIII. ABC ExamplesOutline of Current LectureI. ReviewII. Steps To Variable CostingIII. ComparisonIV. Segment reportingV. Omission CostsVI. GAAPVII. ExamplesCurrent LectureI. Review- All chapters deal with allocating cost. In Chapter 4, we learned the method of absorption costing.The reason we call it this, is because in this method, all of the manufacturing costs are absorbed into the product. o The product cost = direct materials direct labor + variable manufacturing overhead + fixed manufacturing overhead (all overhead allocated using predetermined overhead rate)These notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best Used as a supplement to your own notes, not as a substitute.o POHR= TOTAL Estimated Manufacturing Overhead (variable + fixed) Estimated activity in allocation baseo Applied manufacturing overhead = POHR x Actual Relevant Activity- In chapter 6: Activity Based Costingo Cost of Cost object = DM + DL (any other direct costs like shipping charges) + OH allocated based on activityo One difference of this method, is this overhead includes both manufacturing and non-manufacturing overhead. Sales Commissions are nonmanufacturing overhead but is allocated. All costs that pertain to the product are included. - In chapter 5, what we are starting today, we are learning Variable Costing. We will again be determining the product cost, and when we go back to look at the absorption costing, it is similar but we only consider the VARIABLE costs. o Product cost = DM + DL + ONLY VARIABLE MANUFACTURING OVERHEADo The main difference is that we DO NOT include the fixed manufacturing overheadII. Steps To Variable Costing- First Determine variable costo Includes only costs that are variable with the increase in production. Fixed manufacturing overhead goes straight to the income statement as a period cost in this system. - Compare to absorption cost, why different?o Which method will produce the highest values for work in process and finished goods inventories? Absorption costing; because it includes fixed manufacturing overhead whilevariable costing doesn’t. - Prepare Segment reports.o 20,000 units sold, produced 25,000. No beginning inventory. Selling price is 30. Absorption price is 16/unit; variable is 10/unit. So set up a contribution format statement for the variable costing method due to the separation of the expenses. For an absorption method cant use the contribution format. Our net operating income is more when using an absorption method if there is a remainder of goods in inventory. This is because in the absorption costing method, 6$ of the unit cost is fixed OH so it is still on the balance sheet instead of separated on the income statement as a period expense. III. Comparison- At a zero beginning inventory, and an increase in inventory at the end (due to remaining unsold goods) will make the absorption cost higher than variable costs. Vice versa.- Variable costing categorizes costs as fixed and variable so it is much easier to use this income statement for CVP analysis. Because absorption costing assigns fixed manufacturing overhead costs to units produced. - The fixed overhead, something that managers have little control over, so if we separate that out and show it as a period expense, then we can look at income statement to see where the expenses lie. It helps making decisions easier. IV. Segment reporting- Can be anything we want to get information on. There are two keys to remembero We should use a contribution format statement to easily see the variable difference and fixed difference in expenses. To do this we have to identify the fixed expenses as either  Traceable fixed costs that exists because that segment exists; example if the computer division is investigated; the computer division manager was a traceable fixed cost to that segment. It will completely go away if the segment goes away Common fixed costs will not go away with the elimination of a particular segment. It is a cost of the company due to the overall operation of the business. The CEO’s salary will not go away if the computer tech segment goes away. o It is important to realize that the traceable fixed costs of one segment may be common fixed costs of another segment. If the landing fee to land at an airport t is traceable to the particular flight, but it is not traceable to first class, business class, and economy class passengers. To the flight it’s traceable, but not traceable to the type of classes. - The segment margin is computed by subtracting traceable fixed costs of the segment from its contribution margin. So you would tae traceable fixed costs from your contribution margin to getyour division margin. Common costs will have to be paid no matter what. So take that from the all the division margins added together to get the net income or loss. V. Omission Costs- Any cost that relates to that segment must be traced. Sometimes companies make mistakes, which has generally to do with misallocated costs. Do not arbitrarily assign common costs to the segments. Might make a profitable business segment seem unprofitable, also makes managers responsible for costs that are not under their control. o How much of the common costs will be eliminated if a segment is eliminated? NONE- Suppose square feet are used as the basis of allocating the common fixed cost of 200,000. How much would be allocated to the bar if it occupies 1000 sqft and restaurant is 9,000. Bar will be charged 20,000 of common fixed costs. SSHOULD NOT BE DOING THIS, because if the bar is eliminated, the cost will not go away. This would make the bar look unprofitable due to the misallocation of this cost. If we eliminate the bar, we would lose the profit the bar brings in and the common costs stay the same. VI. GAAP- Have to use absorption costing. Both GAAP and IFRS require publically traded companies to include segmented financial data in their annual reports. Companies try to keep their reports as vague as possible, so they have to be careful not to use variable costing because they have a highamount of information that could be used against them. SO they have to keep these other costing methods


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UNT ACCT 2020 - Variable Costing Vs Absorption Costing

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