FNEC-2600 Study Guide - Midterm Guide: Total Absorption Costing, Direct Labor Cost, Earnings Before Interest And Taxes
15 May 2018
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Chapter 8
• Absorption costing includes fixed overhead in the product costs, and
variable costing does not. Absorption costing is used for external
purposes, while variable costing is used for external purposes.
•
Absorption Costing
Variable Costing
Product Costs
Direct materials
Direct labor
Variable overhead
Fixed over head
Direct materials
Direct labor
Variable overhead
Period Costs
Selling expenses
Administrative
expenses
Fixed overhead
Selling expenses
Administrative
expenses
• Inventory valuation: to determine the value of ending inventory,
multiply the number of units in ending inventory by the per-unit
product cost using the specified method.
o units in ending inventory = units in beginning inventory + units
produced – units sold
• Income statements: the key is calculating the cost of goods sold under
the specified method. Do this by multiplying the per-unit product cost
under the specified method by the number of units sold.
Absorption Costing Income Statement
Sales
$$$$$
Less: Cost of Goods Sold
$$$$$
Gross Margin
$$$$$
Less: Selling and Administrative Expenses
$$$$$
Operating Income
$$$$$
Variable Costing Income Statement
Sales
$$$$$
Less variable expenses
Variable cost of goods sold
$$$$$
Contribution margin
$$$$$
Less: fixed expenses
$$$$$
Fixed overhead
$$$$$
Fixed selling and administrative
$$$$$ $$$$
Operating Income
$$$$$
• production, sales and income relationships
o If production is greater than sales, absorption income is greater
than variable income.
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o If production is less than sales, absorption income is less than
variable income
▪ Selling more than was produced means that at least some
beginning inventory and all units produced are sold. Under
absorption costing, units coming out of inventory include
fixed costs from a prior period. In addition, units produced
and sold have all of the current period’s fixed overhead
attached. Variable costing income is greater than
absorption costing income by the amount of fixed
overhead flowing out of beginning inventory
o if production is equal to sales, absorption income equals variable
income
• segmented income statements
o based on the concept of separating direct and common fixed
expenses among “segments,” which can be product lines,
divisions, departments, etc.
o include a column for each segment, as well as a total column on
the right-hand side.
o segment margin is the amount available to cover non-
controllable/indirect costs of the company
o segment margin ratios = segment margin/segment revenue
▪ useful when evaluating segments of different sizes
MP3 Players
DVDs
Total
Sales
$400,000
$290,000
$690,000
Variable cost of goods sold
(200,000)
(150,000)
(350,000)
Variable selling expense
(20,000)
(14,500)
(34,500)
Contribution Margin
$180,000
$125,000
$305,000
Less direct fixed expenses:
Direct fixed overhead
(30,000)
(20,000)
(50,000)
Direct selling and administrative
(10,000)
(15,000)
(25,000)
Segment margin
$140,000
$90,500
$230,500
Less common fixed expenses:
Common fixed overhead
(100,000)
Common selling and administrative
(20,000)
Operating income
$110,500
Given the information:
MP3 Players
DVD Players
Sales
$400,000
$290,000
Variable cost of goods
sold
200,000
150,000
Direct fixed overhead
30,000
20,000
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find more resources at oneclass.com
Direct fixed selling and
admin
10,000
15,000
Additional information: 5% sales commission for both product lines,
$100,000 factory overhead, and $20,000 common selling and admin
expense
• inventory-related costs
o ordering costs: costs of placing and receiving an order (ex. costs
of insurance for shipment, unloading and receiving costs)
o carrying costs: costs of keeping and storing inventory (ex.
insurance, inventory taxes, obsolescence)
o total inventory-related costs = ordering cost + carrying cost
o stockout costs: e.g. lost sales, expedited shipping, interrupted
production, etc.
o economic order quantity
▪
▪ EOQ is the optimal number of units to be ordered at one
time
▪ CO = cost of placing one order
▪ D = annual demand in units
▪ CC = cost of carrying one unit in inventory for a year
o reorder point: (average daily usage * lead time) + safety stock
▪ safety stock = (max. daily usage – avg. daily usage) *
lead time
• average number of units in inventory is one half of
the units in each order
Chapter 9
• the master budget and its interrelationships
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find more resources at oneclass.com
Document Summary
Chapter 8: absorption costing includes fixed overhead in the product costs, and variable costing does not. Absorption costing is used for external purposes, while variable costing is used for external purposes. Do this by multiplying the per-unit product cost under the specified method by the number of units sold. Under absorption costing, units coming out of inventory include fixed costs from a prior period. In addition, units produced and sold have all of the current period"s fixed overhead attached. Additional information: 5% sales commission for both product lines, ,000 factory overhead, and ,000 common selling and admin expense. : production budget: units to be produced, units to be produced = expected unit sales + units in desired ending inventory units in beginning inventory. 200: direct materials purchases budget, purchases = direct materials needed for production + direct materials in desired ending inventory direct materials in beginning inventory. ,384 ,882 ,860 ,178 ,304: direct labor budget: total direct labor cost.
