ACCT 2020 1st Edition Lecture 10 Outline of Last Lecture I Traditional Costing Vs Activity Based Costing II Three Main Issues Activity Based Costing III ABC Examples Outline of Current Lecture I Review II Steps To Variable Costing III Comparison IV Segment reporting V Omission Costs VI GAAP VII Examples Current Lecture I 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 II POHR TOTAL Estimated Manufacturing Overhead variable fixed Estimated activity in allocation base o Applied manufacturing overhead POHR x Actual Relevant Activity In chapter 6 Activity Based Costing o Cost of Cost object DM DL any other direct costs like shipping charges OH allocated based on activity o One difference of this method is this overhead includes both manufacturing and nonmanufacturing 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 OVERHEAD o The main difference is that we DO NOT include the fixed manufacturing overhead Steps To Variable Costing First Determine variable cost o Compare to absorption cost why different o 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 Which method will produce the highest values for work in process and finished goods inventories Absorption costing because it includes fixed manufacturing overhead while variable 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 remember o o V 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 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 get your 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 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 VI 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 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 high amount of information that could be used against them SO they have to keep these other costing methods more informal VII Examples Exercise 5 1 page 187 o Variable 120 140 50 310 unit o Absorption 120 140 50 600 000 10 000 370 unit Exercise 5 2 page 188 o 2 000 remaining units x 60 fixed Man OH 120 000 this is cost that is on the balance sheet NOT on the income statement o Sales 4 000 000