Lexture 6 Flashcards
Product costs (manafacturing costs)
Direct mat
Direct lab
Man oh (indirect mat, indirect lab, other indirect costs
Period costs (non manafacturing costs)
Selling expenses
Admin expense
Absorption costing example
Sales price 250 a unit Sales volume 1,000,000 Production volume 1,200,000 Costs: Variable manufacturing 660,000 Fixed manafacturing 540,000 Variable manafacturing 500,000 Fixed marketing 700,000
Sales 2,500,000
Cogs: 660,000+540,000 /1,200,000 = 1
1 *1,000,000 (sales units) = 1,000,000
Gross profit 1,500,00
Marketing (var) 500,000
Fixed marketing 700,000
Operating income 300,000
Variable costing example
Sales price 250 a unit Sales volume 1,000,000 Production volume 1,200,000 Costs: Variable manufacturing 660,000 Fixed manafacturing 540,000 Variable manafacturing 500,000 Fixed marketing 700,000
Sales 2,500,000 Cogs: 660,000/1,200,000 =.55 a unit .55 * 1,000,000 =550,000 Marketing var 500,000 Contribution margin 1,450,000 Manufacturing fixed 540,000 Marketing fixed 700,000 Operating income 210,000
Comparing variable and absorption costing
Ab 300,000
Var 210,000
Under ac, closing stocks (production vol - sales vol)
1,200,000 -1,000,000 = 200,000
Fixed cost per unit 540,000/1200000=0.45
200000*0.45=90000
Under ac: inventories snigger (stock absorbs costs) which increases income in current period (increases cost when sold later)
Difference in profit for var and ab
If fg increases (stock is being built up) then profit vc is less than profit of ab.
(Fixed manafacturjnf costs moved into fg stock)
If fg decreasss (stock is reduced) then profit of vc is greater than profit of ab
( fixed man costs moved out of the fg stock into cogs) I
How to do variable costing
Revenues - cogs (= var man costs) - var non man costs = contribution margin - all fixed costs = operating income
How to do absorption costing
Revenues
- cogs (var and fix manafacturing costs)
= gross margin
- all var and fix of non manafacturing costs
= operating income
Absorption costing incentives
Absorption costing with incentives to overproduce to reduce unit costs; forms of real earning management
Methods to reduce this: Keep track of stock building Switch to variable costing Longer time period to evaluate managers Careful budgetinG Jit production
Different denominators possible
Supply driven:
Theoretical capacity: what output can we produce
Practical capacity: what output is practically achievable
Demand driven:
Normal utilisation: what output is normally needed given customer demand
Master budget utilisation: what is needed to meet our budget targets
Benefits of absorption costing
External use:
GAAP / IFRS
Internal use:
Long run decisions might be easier: fixed costs need to be recovered through prices
Same costing as for external use (also easier to communicate)
Benefits of variable costing
External
Singling out fixed cos ts component gives info about capacity
Internal:
Variable costing is closer to cost behaviour
Cvp analysis only depends on unit sales level
Variable costing is not affected by denominator level decisions
Decision influencing perspective: no incentives to build up stock to change operating income
Agency and principals
Investors (principle) va managers (agent)
Principal needs to delegate and give up power: agent should pursue principals interest
Agents have more knowledge or specific skills, but own interests:
More Money > less money
Leisure > work (effort)
Principals need to buy work (effort) from agents
Agents might use advantage against principals interests
Principals should be aware of this conflict and take countermeasures
