02 Variable and Absorption Costing Flashcards
Conventional income statement uses __________ costing.
Absorption Costing
Internal uses prefer __________ P/L.
Contribution Margin or Variable Costing
Inventories cost when incurred and will only be charged against revenue at point of sale.
Product Cost
System where only Raw Materials is considered as product cost and all other costs as period costs.
Throughput Costing / Super Variable Costing
System where all manufacturing and non-manufacturing costs that are value-adding are product costs.
Super Absorption Costing
Treated as an outright expense the moment it was incurred.
Period
Principle that supports period costs
Immediate recognition principle
Principle that supports product costs
Associating cause and effect principle
Other names of variable costing
Direct costing
Determine if the following is a product or period cost under each of the 4 costing systems.
a. DM
b. DL-Variable
c. FOH-V
d. FOH-F
e. S&A-V
f. S&A-F
Variable Costing
Product: A-C
Period: D-F
Absorption Costing
Product: A-D
Period: E-F
Throughput Costing
Product: A
Period: B-F
Super Absorption Costing
Product: A-F (provided it is value-adding)
For what decision making is each of the costing systems used?
Variable - internal
Absorption - external
Throughput - theory of constraints
Super Absorption - life cycle costing
Other names of absorption costing
Conventional costing or full costing
How does variable and absorption costing segregate costs?
Variable - according to behavior (fixed and variable)
Absorption - according to function
What are the revenue drivers of variable and absorption costing?
Variable - sales unit
Absorption
1. unit level of sales
2. unit level of production
3. chosen denominator level
Why is absorption costing not reliable for internal reports?
Managers can manipulate net income by producing more than what is being sold.
They can also prioritize products that absorb the highest amount of fixed cost.
the maximum possible value that a system can hold or produce under ideal conditions
Theoretical/Ideal Capacity
Strategies to avoid manipulation of net income
- Use variable costing as basis for bonuses
- Lengthen period used to evaluate performance
- Careful budgeting and inventory planning
- Incorporate an internet carrying charge for inventory
- Include non-financial and financial variables in performance evaluation
the highest realistic amount of output that a factory can maintain over the long term
Practical Capacity
The Four Cost Systems
- actual - actual price and quantity for materials, labor and overhead
- normal - actual price and quantity for materials and labor, standard price and quantity for overhead (applied overhead)
- extended normal or flexible - standard price and actual quantity for materials, labor and overhead
- standard or static - standard price and quantity for materials, labor, and overhead
the anticipated level of capacity utilization for the coming year or other planning period
Master Budget Capacity
the production achieved or achievable on an average over a period or season under normal circumstances taking into account the loss of capacity resulting from planned maintenance
Normal Capacity
Reconciling net income under actual cost system
Net income under variable costing
+ Fixed cost in ending inventory
- Fixed cost in beginning inventory
= Net income under absorption costing
What do you do to under applied and over applied overhead?
Close to COGS
* underapplied - add to COGS
* overapplied - deduct from COGS
Reconciling net income under normal cost system with significant variance
Net income under variable costing
+ Fixed cost in ending inventory
- Fixed cost in beginning inventory
+/- Under/Over applied OH in inventory
= Net income under absorption costing
Reconciling net income under normal cost system with insignificant variance
Net income under variable costing
+ Fixed cost in ending inventory
- Fixed cost in beginning inventory
= Net income under absorption costing
Reconciling CM and GP
CM
+ Variable S&A
- Fixed OH based on units sold
= GP
