Absorption and Variable Costing Essays

Absorption and Variable Costing Essays Absorption and Variable Costing Paper Absorption and Variable Costing Paper CHAPTER 8 ABSORPTION AND VARIABLE COSTING Learning Objectives 1. Explain the accounting treatment of fixed manufacturing overhead under absorption and variable costing. 2. Prepare an income statement under absorption costing. 3. Prepare an income statement under variable costing. 4. Reconcile reported income under absorption and variable costing. 5. Explain the implications of absorption and variable costing for cost-volume-profit analysis. 6. Evaluate absorption and variable costing. 7. Explain the rationale behind throughput costing. . Prepare an income statement under throughput costing. Chapter Overview I. Product Cost and Fixed Manufacturing Overhead A. Absorption-costing income statements B. Variable-costing income statements II. Reconciliation of Absorption- and Variable-Costing Income A. No change in inventory levels B. Increase in inventory levels C. Decrease in inventory levels III. Overall Evaluation of Absorption and Variable Costing IV. Throughput Costing Key Lecture Con cepts 1. PRODUCT COST AND FIXED MANUFACTURING OVERHEAD Product, or manufacturing, costs are comprised of direct materials, direct labor, variable manufacturing overhead, and fixed manufacturing overhead. The basic difference between absorption and variable costing is the treatment of fixed manufacturing overhead. * With absorption (full) costing, all costs related to the manufacture of a good are product costs. Therefore, fixed manufacturing overhead attaches to the units being made and is carried in inventory until the product is sold. * Absorption costing results in the preparation of a traditional income statement. Absorption costing is considered GAAP and is acceptable for tax reporting. * Under variable costing, product cost is comprised solely of variable manufacturing costs. Fixed manufacturing overhead is viewed as a cost of being ready to produce, not an actual production cost (i. e. , the cost will remain constant no matter how many units are manufactured). * Fixed manufac turing overhead is treated as a period cost and expensed immediately. * The income statement highlights cost behavior and is presented in a contribution margin format. Variable costing is useful to managers, as it dovetails nicely with cost-volume-profit analysis. 2. RECONCILIATION OF ABSORPTION- AND VARIABLE-COSTING INCOME * The difference between the two approaches is the timing of when fixed manufacturing overhead is shown on the income statement: when the product is sold under absorption costing and when incurred under variable costing. * The two methods will usually produce different income figures. * No change in inventory: production = sales * Under variable costing, all fixed manufacturing overhead is expensed. With absorption costing, the periods fixed overhead flows through to cost of goods sold. * Absorption-costing net income equals variable-costing net income. * Increase in inventory: production ; sales * Under variable costing, all fixed manufacturing overhead is expensed. With absorption costing, a portion of the periods fixed overhead flows through to cost of goods sold and a portion remains on the balance sheet in inventory. * Absorption-costing net income is greater than variable-costing net income. * Decrease in inventory: sales production Under variable costing, all fixed manufacturing overhead is expensed. With absorption costing, as units manufactured in a prior period are sold, an amount greater than the current periods fixed overhead flows through to cost of goods sold. * Absorption-costing net income is less than variable-costing net income. * The difference between absorption- and variable-costing income figures can be reconciled as follows: Income difference = Inventory change in units x Fixed overhead per unit The difference is likely to be very small over a lengthy time period. . OVERALL EVALUATION OF ABSORPTION AND VARIABLE COSTING * Pricing decisions * Absorption-cost proponents argue that fixed manufacturing overhead is a necessary production cost. Excluding this element from the inventoried cost of a product will understate the goods cost, which is troublesome for companies that use cost-based pricing techniques. * Variable-cost proponents argue that variable cost is better for pricing decisions. Any price above a goods variable cost results in a positive contribution margin for the company. Many firms use variable costing for internal-reporting purposes. Given that absorption costing must be employed for external financial reporting, companies can use both methods by making several simple end-of-period adjustments. 1 If a company operates in a just-in-time environment, inventories are kept very low and there will be little change in inventor y from period to period. Thus, the income differences between absorption and variable costing will normally be insignificant. 4. THROUGHPUT COSTING Throughput costing assigns only the unit-level spending for direct costs as the cost of products or services. * A unit-level cost is incurred every time that a unit of product is manufactured. * All costs other than the throughput cost are considered to be operating expenses of the period. * Proponents of throughput costing argue that this procedure eliminates the incentive to produce excess inventory because all non-throughput costs are expensed regardless of manufacturing volume.

When To Use Time Sensitive Salutations [Etiquette Mistakes]

When To Use Time Sensitive Salutations [Etiquette Mistakes] Two participants in our Effective Business Writing courserecentlyquestioned why using â€Å"Good Evening† was not best practice for an email salutation. We always want to engage our reader, and shape any document, including email, from our reader’s perspective, not our perspective. With email, when the recipient is likely to read the email is more relevant than when we send it. Good Evening Email Etiquette For example, if you work in London and send an email off at 9:00 P.M. to a colleague or customer in Los Angeles, the recipient would receive it 1:00 P.M. Los Angeles time. If the first words your recipient reads are â€Å"Good Evening† while he or she sees the sun shining and is midway through the work day, it fosters reader disconnect. If you do not know when your reader is going to read your email message, choose a time-neutral salutation: Dear, Hello, Hi – choosing whichever best matches the relationship and purpose of your email. (More on appropriatebusiness email salutions.) Using the salutation â€Å"Good Morning† can be particularly warm and engaging, if you are certain your reader will receive your message in the morning. For example, you have a phone conversation with your reader in the morning (reader time zone), and promise to email a document right after you conclude the call. In this case, â€Å"Good Morning† is a great salutation because it enhances the connection because it is immediate and warm and reader-focused. This same thought process should apply to description of your activities. My friend, based in Seattle, recently shared that she was momentarily concerned when her colleague, based in Glasgow, sent an email to her that began â€Å"I’m savoring a single malt and reading your proposal†¦Ã¢â‚¬  It was 6:00 P.M. in Glasgow, so a single malt was well deserved and in order, but it was a little jarring at first read for my friend in Seattle, who was sipping morning coffee at 10:00 A.M. Of course, any reader will understand with brief reflection, but we don’t want to require reflection or questioning. We want to engage our readers right away. Reader-focused writing requires that we keep content, organization and tone on our reader, not on our own thoughts. Good Night Use â€Å"Good Morning† and â€Å"Good Night† with care – they are engaging when you know your reader will read them at the right time, but will wedge an intimation of lack of awareness for your reader if you miss the time mark. Master Business Email in ThisEmail Course