Tut4 Slide Managerial ACC

8/13/2019 Tut4 Slide Managerial ACC

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Tutorial 4 - summary Pertinent points to note.

Components of COS and Expenses inthe Income Statement under the twocosting systems (AC, VC).

Reflecting the differences in NOIreported that lies primarily in the FMOHdeferred.

Effect on profit

Observations/inferences.


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Tutorial 4 Pertinent Points onAbsorption/Variable Costing

Difference between the income reported under AC asagainst VC is in the deferred fixed MOH applied to theinventory change . i.e.

( AC-VC) = FMOH per unit X change in Inventory

(CI OI)

Change in Invy = Diff in Income unit FMOH cost(CI OI)

units Produced = units Sold change in inventory(=closing inventory opening inventory)


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Composition of COS & expenses

Under VC * Under AC

Cost of Sales- Cost of Sales-

COGS (as variable costs) COGS(as variable costs)

Variable S,G&A Fixed MOH on units sold(FMOH applied to the FG sold)

Operating Expenses - Operating Expenses -

Fixed MOH Total S,G&A(Fixed + Variable)Fixed S,G&A


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Variable

Costing

Absorption

Costing DifferencesJuly July

Units sold 15,000 Units sold 15,000

Units produced 17,500 Units produced 17,500

Opening inventory 0 0

Ending inventory 2,500 2,500

Sales $900,000 Sales $900,000

Less: Variable expenses- Less: Cost of goods sold -

Product cost - COGS @ $22

per unit ($330,000)

Product cost - COGS @ $22

per unit ($330,000)

Variable selling @ $3 ea ($45,000) Fixed OH @ $18 ea unit ($270,000)

Total variable costs/expenses ($375,000) Total costs ($600,000)

Contribution margin $525,000 Gross Margin $300,000

Less: Fixed expenses: Less: Operating expenses:

Fixed mfg overhead 315,000

Fixed selling & admin exp. 245000 Total Selling & admin exp. $290,000

Total fixed expenses 560,000 Total operating expenses $290,000

Net operating income (loss) ($35,000) Net operating income (loss) $10,000 ($45,000)

Ending Invy 2,500 units

@$22 ea $ 55,000

Ending Invy 2,500 units @$40

ea $ 100,000 $ 45,000

Fixed OH deferred in the change in Inventory.

Comparison


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Effect on Profit under AC vs VCYear 1 Year 2 Year 3

Sales units (S) 50,000 40,000 50,000

Production units (P) 50,000 60,000 40,000

Opening Inv'y (OI) - - 20,000

Closing Inv'y (CI) - 20,000 10,000

Relationship :-

Production vs Sales P = S P>S POI CI VC AC


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Observations AC vs VC

Scenario1 Scenario 2 Scenario 3

Absorption costingNOI = Variable

costing NOI

Absorption costingNOI > Variable

costing NOI

Absorption costingNOI < Variable

costing NOI

Production = Sales Production > Sales Production < Sales

Inventories remainthe

same/unchanged Inventories grow Inventories shrink


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Is Variable costing same as Directing costing?The term direct costingis a misnomer. Variable costing is notsynonymous to direct costing.Under variable costing, the variable costs of direct material, direct labor,

and variable overhead are treated as inventoriable product costs.

Not all variable costs are direct costs, but they are treated as productcosts under the variable-costing method. For example, the costs ofrunning machinery used in manufacturing are not direct costs, but theyare likely to be variable or semi-variable. Variable costing includes as

inventoriable costs not only direct manufacturing costs but also someindirect costs (variable indirect manufacturing costs).

Any fixed direct manufacturing costs, and any direct non-manufacturing

costs (either variable or fixed), are excluded from inventoriable costs.Hence, under variable costing fixed MOH costs are not treated as productcosts.


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Tutorial 5 Assignment

Group K15, & K17

Team 1 = Qn 3, Problem 10-26

Team 2 = Qn 1 & 2, Problem 10-11 & 10-19,

Team 3 = Qn 4, Supple Qn 1,

Team 4 = Qn 5, Supple Qn 2

Group K 16 Teams 1 to 5 - Question 1 to 5 respectively


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Tutorial 4 Assignment

Group K15, & K17

Team 1 = Qn 1 & 2, Supple Question on ABC& Problem 7-17

Team 2 = Qn 3, Problem 5-14,

Team 3 = Qn 4, Problem 5-16,

Team 4 = Qn 5, Case 5-20

Group K 16

Teams 1 to 5 - Question 1 to 5 respectively

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Tut4 Slide Managerial ACC