Projection and Forecasting Flashcards
High Low Method Calculation
Take the difference of the highest and lowest cost divided by the difference between the highest and lowest units produced to get the variable cost per unit
Solving for fixed costs using the high-low method
Multiply the variable cost per unit (solved) by either the high or low units. The remaining amount of the total costs shown in the table is the fixed cost
Learning Curve - Average time
Learning Curve % * hours to produce the previous amount of units
Learning Curve - Total time
Average time * units desired
Differences between absorption and contribution approach
- fixed OH is a product cost for absorption
- fixed OH is a period cost for contribution
- note that selling, general and administrative expenses are period costs
Product Costs under Absorption Method
DM
DL
Variable OH
Fixed OH
Period Costs under Absorption Method
Variable and fixed SG&A
Product Costs under Direct (Variable) Method
DM
DL
Variable OH
Period Costs under Direct (Variable) Method
Fixed OH
Variable and fixed SG&A
Gross Margin
Sales - COGS
Margin of Safety
Actual sales - BE Sales
When production is greater than sales in a period, what is the effect on income under the absorption and direct (variable) method?
Absorption net income is greater since the fixed OH does not enter the income statement, as it is a part of inventory still. Direct (variable) income will expense all of its variable and fixed costs in the period of production
When production is less than sales in a period, what is the effect on income under the absorption and direct (variable) method?
Absorption net income is less since the fixed OH does enters the income statement, as it is a part of COGS. Direct (variable) income will expense all of its variable and fixed costs in the period of production but since production is lower than sales, will result in a more favorable net income position.
Limitations of Absorption Costing
Effects inventory levels
Less reliable since fixed OH is spread throughout inventory, skews net income
Limitations of Direct (Variable) Costing
Not GAAP
IRS does not allow for financial reporting
