BEC Deck 3 : Decision Making (mostly) Flashcards
Absorprtion Costing (external reporting format)
Sales (Variable COGS) (Fixed COGS) = Gross Margin (Variable SG&A) (Fixed SG&A) = Operating Income
Variable Costing (internal use)
Sales (Variable COGS) (Variable SG&A) = Contribution Margin (Fixed COGS) (Fixed SG&A) = Operating income
Break-even in Dollars (Cost-volume profit formulas)
Fixed Cost + Desired Profit / Contribution Margin Ratio
Contribution Margin Ratio : Sales Price - VC / Sales Price
Cost of Goods Manufactured (COGM)
BEG WIP \+ DM (beg DM + DM purchased - ending DM / DM used_ \+ DL \+ MOH (applied) - Ending WIP = COGM
COGS (cost of goods sold)
Beg finished goods
+ COGM (cost of goods available for sale)
- Ending finshed goods
= COGS
Accounting for spoilage costs in manufacturing
Type of spoilage
Normal Spoilage»_space;»» Product Cost»_space;»»»Charged to COGS (inventory); recognized as an expense when sold
Abnormal Spoilage»_space;»»» Period Costs»_space;»»»>Charged to expense in the period discovered
Predetermined overhead
Estimated overhead costs / Estimated machine hours (or base allocation)
Inventoriable / Products Costs
The following are how costs are handled under each costing method
DM, DL, Variable MOH – costs assinged to inventory under both absorption and variable costing methods
Fixed MOH – only assigned to inventory under absorption
Variable and Fixed SGA not assigned to inventory for either of the methods
Absorption Costing Variable Costing DM Yes Yes
DL Yes Yes
Variable MOH Yes Yes
Fixed MOH Yes NO
Variable SGA No No
(selling, general and administrative)
Fixed SGA No No
Absorption and Variable (also called the direct costing method)
Because absorption and variable method handle fixed OH different (absorption INCLUDES it in product/inventoriable costs, while variable EXCLUDES it in product/inventoriable costs.
The difference will be the amount of fixed OH.
** Ending inventory, COGS, and operating income are generally different between the two methods. **
Ending inventory will be GREATER under Absorption costing by the amount of FOH.
- —-Current assets and the current ratio will be GREATER under absorption method.
- —-Return on stockholders equity will be SMALLER under A/C than under V/C.
- —-Net income will be the SAME under either method because an equal amount of FOH will be expensed either as a period cost under V/C or included in COGS as a product cost under A/C.
Relevant Costs
Future costs that differ between alternatives:
- Opportunity costs
- Old asset sales price
- New asset purchase price
Absorption and Varabble costs
w/ COGS difference, ending inventory, etc
COGS decreases when ending inventory increases
**income under absorption costing will be more than under variable costing *
The difference in operating income will be equal to the fixed MOH per unit multipled by the change in EI.
Absorption Costing explanations when have ending inventory
If we produce more than we sell then we will have ending inventory.
When we have ending inventory, operating income will be more under A/C than v/c.
Under Absorption Costing, ending inventory includes FOH, resullting in greater ending inventory cost, lower COGS and higher net income.
When inventory is sold, COGS will be greater under A/C because it includes FOH
Product Cost %
Sales - Gross Margin % = Product Cost %
Gross Margin plus the product cost = Sales Price
For example, if Gross Margin is 40%, the product cost % must be 60%
Gross Margin % + Product % must = 100
So the profit amount + the product cost amount must equal the amount we are selling the product for.
Period Costs
- - Under Variable - - Under Absortpion
Under Variable Costing – Fixed MOH, Variable SGA and Fixed SGA
Under Absorption Costing - Variable SGA and Fixed SGA
Variable Cost Ratio and CM Ratio
Variable cost ratio + Contribution Margin Ratio = 100%
Breakeven Analysis Assumptions
- Fixed and Variable costs can be easily identified
- Total V/C vary directly with how much items are produced
- Total fixed costs will stay the same no matter how many products are produced (fixed costs stay the same no matter the range of products made, not per unit)
- Selling price per unit is the same no matter how mnay products are sold
- The sales mix of products will stay the same
- All productions will be sold
Mapping
Mapping is used to determine which elements in the entitys computer system correspond to the standards in an EDI system.
Ways you can convert the data into the appropriate form to enable the transaction.
—Decoding
— Translation
— Encryption
Deflation
Deflation occures when prices fall due to a long-term drop in demand. Consumers begin to defer purchases and/or investments until they can get a better deal.
This forces manufactures to continually lower prices, which leads to lower wages and less investment spending.
Deflation often signals an impending recession.
To combat deflation, the Federal Reserve (the Fed) will typically adopt an expansionary monetary policy. This policys will stimulate the demand and promote consumer and business spending.
Gov’t will buy federal securites, lower the discount rate, ad decrease the reserve for member banks. The goal is to increase the money supply to stimulate demand and spending.
Net income (manufaturing – decision making ch)
Sales - COGS = Gross Profit - Marketing and Admin Exp = Net
Assets increasing in relation to stockholders equity
If assets increase with no change in liabilities, then stockholders equity must also increase.
Fixed OH in Variable and Absorption
Absorption costing treats Fixed OH as a product cost – expense FOH when its sold, it includes it in the product price.
Variable costing treats Fixed OH as a period cost – expense FOH as incurred.
When you produce LESS items than you sell, you will have to use items that were left over in ending inventory.
- Under absorption ending inventory includes FOH cost resulting in greater COGS and smaller net income than under variable costing.
- The cost difference will result in a profit under variable cost and a loss under absorption.
Fixed OH Application rate
Expected fixed costs / Expected volume
- If both actual fixed costs and actual volume are equal to expected amounts, overhead applied will be equal to actual overhead.
- If actual amount of items produced is MORE than expected to produce or if actual fixed overhead is LOWER than expected, the amount of overhead applied (actual volume times the predetermined rate) will be more than the amount and fixed overhead will be OVERAPPLIE.
- If we produce LESS than expected than or actual fixed costs are GREATER than expected, the amount of overhead applied will be LOWER than the actual amount and fixed overhead will be UNDERAPPLIED.
Cost of goods sold
Cost of goods sold decreases when ending inventory increases.
Cost of goods sold increases when ending inventory decreases.
Absorption costing includes fixed overhead (FOH) as an inventory cost, while variable costing expenses FOH as incurred. As a result, whenever we produce LESS than we sell, we will have to use items from ending inventory (ending inventory is drawn from and sold off).
When this happens, under absorption costing, COGS will be greater and net income will be smaller than variable costing.
This could result in a profit under variable costing and a loss under absorption costing.
