Академический Документы
Профессиональный Документы
Культура Документы
LearningOutcomes
Uponcompletionofthiscourse,teacher participantsshouldbeableto: compareand contrast betweenmarginal costingandabsorptioncosting; calculateandpresent netprofitundermarginal costingandabsorptioncosting;and explainand evaluate theusesofmarginal costingandabsorptioncosting.
2
SyllabusinHKDSEExamination
Comparetheuse ofmarginalandabsorption costinginpreparing:
(i)Manufacturingaccounts (ii)Incomestatements OperatingStatements
Contents
Segregationofcostintovariableandfixedelements (Illustration1) Marginalcostingvs.absorptioncosting(Illustrations25) Normalabsorptioncosting(Illustration6) Overheadabsorptionrate(Illustration6) Calculationandtreatmentofoverheadover absorbed/underabsorbed(Illustration6) Advantagesanddisadvantagesofmarginalcostingand absorptioncosting Casestudy integratedillustrativequestion
4
PriorKnowledgeRequired
SegregationofCostintoVariableandFixedElements
Illustration1 SegregationofCostintoVariableandFixedElements
Themanufacturingcostvarieswithproduction volumesasfollows:
ProductionVolume 1,000units 1,800units TotalManufacturingCost $400,000 $600,000
Illustration1 SegregationofCostintoVariableandFixedElements
MarginalCosting (alsoknownasVariableCosting)
TotalCost
ProductCost
PeriodCost
10
AbsorptionCosting (alsoknownasFullCosting)
11
TotalCost
ProductCost
PeriodCost
VariableNonManufacturingOverheads FixedNonManufacturingOverheads
12
Illustration2 MarginalCostingvs.AbsorptionCosting
Amanufacturingcompanyproducesasingleproduct.Duringthe yearended31December2009,10,000unitswereproducedand sold.Therewasnoopeninginventory.Thecostsofmanufacturing duringtheyearwereshownasfollows:
Costs
DirectMaterials DirectLabour VariableManufacturingOverheads FixedManufacturingOverheads VariableSellingOverheads FixedSellingandAdministrativeOverheads
13
Allthe10,000unitsweresoldat$200each.
Illustration2 MarginalCosting
ProductCostunderMarginalCosting
DirectMaterials DirectLabour VariableManufacturingOverheads TotalProductCosts
14
Illustration2 MarginalCosting
PeriodCostunderMarginalCosting
FixedManufacturingOverheads VariableSellingOverheads FixedSellingandAdministrativeOverheads TotalPeriodCostchargedtoIncomeStatement
15
Illustration2 MarginalCosting
OperatingStatementunderMarginalCosting fortheyearended31December2009
Sales(10,000unitsat$200each) Less:VariableCostofSales ProductContributionMargin Less:VariableSellingOverheads TotalContributionMargin Less: FixedManufacturingOverheads FixedSellingandAdministrativeOverheads NetProfit
16
Illustration2 AbsorptionCosting
ProductCostunderAbsorptionCosting
DirectMaterials DirectLabour VariableManufacturingOverheads FixedManufacturingOverheads TotalProductCosts
17
Illustration2 AbsorptionCosting
PeriodCostunderAbsorptionCosting
VariableSellingOverheads FixedSellingandAdministrativeOverheads TotalPeriodCostchargedtoIncomeStatement
18
Illustration2 AbsorptionCosting
OperatingStatementunderAbsorption Costing for the yearended 31 December Sales (10,000 unitsat $200 each) 2009
Less:CostofSales GrossProfit Less: VariableSellingOverheads FixedSellingandAdministrativeOverheads NetProfit
19
Illustration2 MarginalCostingandAbsorptionCosting:Implications
20
21
ComparisononImpactsofInventoryonNetProfit
Inventory Noopeninginventory andnoclosinginventory (Illustration2above) ImpactonProfit Nodifferencein profitbetween absorptioncosting andmarginalcosting Nodifferencein profitbetween absorptioncosting andmarginalcosting Reason Allthefixedmanufacturing overheadsarecharged againstthecurrentyear profit(eitherasproduct costorperiodcost) Fixedcostelement broughtforwardfromlast periodandabsorbedin openinginventoryisfully compensatedbyfixedcost elementcarriedforwardto nextperiodandabsorbed inclosinginventory
22
ComparisononImpactsofInventoryonNetProfit
Inventory Fixedmanufacturing overheadinclosing inventoryisgreaterthan thatinopeninginventory (alwaysbutnot necessarily productionvolume>sales volume) Fixedmanufacturing overheadinclosing inventoryissmallerthan thatinopeninginventory (alwaysbutnot necessarily productionvolume<sales volume)
23
Reason Agreateramountoffixed manufacturingoverheadis includedinclosing inventoryandcarried forwardtonextaccounting period Agreateramountoffixed manufacturingoverheadin openinginventoryis chargedagainstthe currentyearprofit
ImpactsofInventoryonNetProfit Summary
24
Illustration3 WhenthereisClosingInventory
25
Illustration3 MarginalCosting
ProductCostunderMarginalCosting
DirectMaterials DirectLabour VariableManufacturingOverheads TotalProductCosts VariableCostofGoodsSoldfortheYear ($840,000x8,000/10,000) ClosingInventoryc/ftoNextYear ($840,000x2,000/10,000)
$672,000 $168,000
26
Illustration3 MarginalCosting
PeriodCostunderMarginalCosting
FixedManufacturingOverheads VariableSellingOverheads FixedSellingOverheads TotalPeriodCostchargedtoIncomeStatement
27
Illustration3 MarginalCosting
OperatingStatementunderMarginalCosting fortheyearended31December2009
Sales(8,000unitsat$200each) Less:VariableCostofGoodsSold ProductContributionMargin Less:VariableSellingOverheads TotalContributionMargin Less: FixedManufacturingOverheads FixedSellingandAdministrativeOverheads NetProfit
28
Illustration3 AbsorptionCosting
ProductCostunderAbsorptionCosting
DirectMaterials DirectLabour VariableManufacturingOverheads FixedManufacturingOverheads TotalProductCosts CostofGoodsSoldfortheYear ($1,140,000x8,000/10,000) ClosingInventoryc/ftoNextYear ($1,140,000x2,000/10,000)
29
$912,000 $228,000
Illustration3 AbsorptionCosting
PeriodCostunderAbsorptionCosting
VariableSellingOverheads FixedSellingandAdministrativeOverheads TotalPeriodCostchargedtoIncomeStatement
30
Illustration3 AbsorptionCosting
OperatingStatementunderAbsorption Costing for the year ended 31December 2009 Sales (8,000 units at$200 each)
Less:CostofGoodsSold GrossProfit Less: VariableSellingOverheads FixedSellingandAdministrativeOverheads NetProfit
31
Illustration3 Reconciliation:MarginalCostingandAbsorptionCosting
NetProfitunderAbsorptionCosting(slide31) Less:FixedManufacturingOverheadsinClosingInventory ($300,000/10,000x2,000)($30perunit) NetProfitunderMarginalCosting(slide28)
32
Illustration4
FixedOverheadinClosingInventoryLessThanOpeningInventory
Continuewithillustration3(withclosinginventoryof2,000unitsas at31December2009).Duringtheyearended31December2010, 9,000unitswereproducedandthecostsofmanufacturingwere:
Costs
DirectMaterials DirectLabour VariableManufacturingOverheads VariableSellingOverheads FixedManufacturingOverheads FixedSellingandAdministrativeOverheads 10,000unitsweresoldat$210each.
33
Illustration4 MarginalCosting
OperatingStatementunderMarginalCosting fortheyearended31December2010
Sales($210x10,000) Less: CostofGoodsSold: OpeningInventory($84x2,000)(slide26) VariableCostofGoodsCompleted($100x9,000) Less:ClosingInventory(assumingFIFO,$100x1,000) ProductContributionMargin Less:VariableSellingOverheads($16x10,000) TotalContributionMargin Less: FixedManufacturingOverheads FixedSellingandAdministrativeOverheads NetProfit
34
$
2,100,000
168,000 900,000 (100,000) (968,000) 1,132,000 (160,000) 972,000 (261,000) (280,000) 431,000
Illustration4 AbsorptionCosting
OperatingStatementunderAbsorptionCosting fortheyearended31December2010
Sales($210x10,000) Less: CostofGoodsSold: OpeningInventory($114x2,000)(slide29) CostofGoodsCompleted($100x9,000+$261,000) Less:ClosingInventory[assumingFIFO, [($100+$261,000/9,000)x1,000] GrossProfit Less: VariableSellingOverheads($16x10,000) FixedSellingandAdministrativeOverheads NetProfit 228,000 1,161,000 (129,000) (1,260,000) 840,000 (160,000) (280,000) 400,000
$
2,100,000
35
Illustration4 Reconciliation:MarginalCostingandAbsorptionCosting
$
NetProfitunderAbsorptionCosting Add:FixedManufacturingOverheadsinOpeningInventory ($300,000/10,000x2,000)($30perunit) Less:FixedManufacturingOverheadsinClosingInventory ($261,000/9,000x1,000)($29perunit) NetProfitunderMarginalCosting 400,000 60,000 (29,000) 431,000
36
Illustration5
ProductionVolume=SalesVolumebutFixedOverheadsAbsorbedin OpeningInventoryandClosingInventoryDifferent
37
Illustration5 MarginalCosting
OperatingStatementunderMarginalCosting fortheyearended31December2010
Sales($210x9,000) Less: CostofGoodsSold: OpeningInventory($84x2,000)(slide26) VariableCostofGoodsCompleted($100x9,000) Less:ClosingInventory(assumingFIFO,$100x2,000) ProductContributionMargin Less:VariableSellingOverheads($16x9,000) TotalContributionMargin Less: FixedManufacturingOverheads FixedSellingandAdministrativeOverheads NetProfit
38
$
1,890,000
168,000 900,000 (200,000) (868,000) 1,022,000 (144,000) 878,000 (261,000) (280,000) 337,000
Illustration5 AbsorptionCosting
OperatingStatementunderAbsorptionCosting fortheyearended31December2010
Sales($210x9,000) Less: CostofGoodsSold: OpeningInventory($114x2,000)(slide29) CostofGoodsCompleted($100x9,000+$261,000) Less:ClosingInventory[assumingFIFO, [($100+$261,000/9,000)x2,000] GrossProfit Less: VariableSellingOverheads($16x9,000) FixedSellingandAdministrativeOverheads NetProfit 228,000 1,161,000 (258,000) (1,131,000) 759,000 (144,000) (280,000) 335,000
$
1,890,000
39
Illustration5 DifferenceinProfit
Illustration5 Reconciliation:MarginalCostingandAbsorptionCosting
$
NetProfitunderAbsorptionCosting(slide39) Add:FixedManufacturingOverheadsinOpeningInventory ($300,000/10,000x2,000)($30perunit) Less:FixedManufacturingOverheadsinClosingInventory ($261,000/9,000x2,000)($29perunit) NetProfitunderMarginalCosting(slide38) 335,000 60,000 (58,000) 337,000
41
Format Reconciliation:MarginalCostingandAbsorptionCosting
$
NetProfitunderAbsorptionCosting Add:FixedManufacturingOverheadinOpeningInventory Less:FixedManufacturingOverheadinClosingInventory NetProfitunderMarginalCosting X X (X) X
42
TwoApproachestoAbsorptionCosting
ActualAbsorptionCosting Absorbedonactualbasis (Asillustrations25butitis impracticalbecause overheadabsorptionhasto bewaiteduntilexpiryofthe accountingperiod) NormalAbsorptionCosting Absorbedonpre determinedoverhead absorption (Thisistheusualpractice andisimpliedunlessstated otherwise)
44
IssuesforNormalAbsorptionCosting
45
CalculationofFixedManufacturing OverheadAbsorptionRate(OAR)
Overabsorption/Underabsorption ofOverhead
47
TreatmentofOverorUnder AbsorptionofOverheads
48
Illustration6 NormalAbsorptionCosting
49
Illustration6 OverheadAbsorptionRate
50
Illustration6 Overabsorption/UnderabsorptionofOverheads
51
Illustration6 NormalAbsorptionCosting
OperatingStatementunderNormalAbsorption Costingfortheyearended31December2010
Sales($210x100,000) Less: CostofGoodsSold: OpeningInventory($114x2,000) CostofGoodsCompleted[($100+$30)x9,000) Less:ClosingInventory[assumingFIFO, ($100+$30)x1,000] Less:FixedManufacturingOverheadsOverabsorbed GrossProfit Less: VariableSellingOverheads FixedSellingandAdministrativeOverheads NetProfit
52
$
2,100,000
228,000 1,170,000 (130,000) 1,268,000 (9,000) (1,259,000) 841,000 (160,000) (280,000) 401,000
Illustration6 ActualAbsorptionCostingandNormalAbsorptionCosting
54
55
Summary Similarities
MarginalCosting AbsorptionCosting Variablemanufacturingcostsaretreatedas productcosts. Nonmanufacturingcosts(whethervariableor fixed)aretreatedasperiodcosts.
56
Summary Differences
MarginalCosting Fixedmanufacturingcostsaretreatedas periodcosts. AbsorptionCosting Fixedmanufacturingcostsaretreatedas productcosts. Noproblemofoverabsorptionorunder Actualabsorptioncosting:Noproblemofover absorptionoffixedmanufacturingoverheads. absorptionorunderabsorptionoffixed manufacturingoverheads. Normalabsorptioncosting:Thereisproblemof overabsorptionorunderabsorptionoffixed manufacturingoverheads. Operatingstatementshowscontribution margin(salesrevenuelessvariablecosts). Netprofitistheexcessofcontribution marginoverfixedcosts. Distinctionbetweenvariablecostsandfixed costsisrelativelyimportant. Particularlyusefulforshorttermdecision making. Operatingstatementshowsgrossprofit(sales revenuelesscostofgoodssold). Netprofitistheexcessofgrossprofitovernon manufacturingcosts. Distinctionbetweenmanufacturingcostsand nonmanufacturingcostsisrelativelyimportant. Requiredforexternalreporting.
OperatingStatementFormat MarginalCosting
$ Salesrevenue Less: Variablecostofgoodssold Openinginventory Variablecostofgoodscompleted Less:Closinginventory Productcontributionmargin Less: Variablenonmanufacturingoverheads Totalcontributionmargin Less:Fixedcosts Netprofit X X (X) (X) X (X) X (X) (X) $ X
58
OperatingStatementFormat AbsorptionCosting
$ Salesrevenue Less: Costofgoodssold Openinginventory Manufacturingcostofgoodscompleted Less:Closinginventory Add/Less:Overheadsunderabsorbed/(overabsorbed) GrossProfit Less:Nonmanufacturingcosts Netprofit X X (X) X X X X (X) (X) $ X
59
Activity IntegratedIllustrativeQuestion
60
Question(1)
Amanufacturingcompanyproducesandsellsa singleproduct.Thefollowingbudgeteddatahad beenpreparedforaoneyearperiod:
LevelofActivity 100% $000 Salesrevenue Totalmanufacturingcosts Totalsellingandadministrativecosts (Variablepartvarieswithsalesvolume)
61
Question(2)
Incompilingtheabovebudgeteddata,ithad beenassumedthatsalesvolumewasequalto theproductionvolume.Inaddition,thenormal levelofactivity was100%atwhichitwas estimatedthat60,000unitscouldbeproduced intheperiod.
62
Question(3)
Theactualresultsfortheperiodareexhibitedas follows: 1.66,000unitswereproducedand62,000units weresold. 2.Unitsellingprice,unitvariablecostsandfixed overheadsarethesameasbudgeted. 3.Therewasnoopeninginventory.
63
Question(4)
Required a) Calculatethemanufacturingoverheadabsorptionrate. b) Calculatetheamountoffixedmanufacturingoverhead absorbedintheproducts. c) Calculatetheamountoffixedmanufacturingoverheadover absorbedorunderabsorbed. d) Preparetheoperatingstatementunderabsorptioncosting. e) Preparetheoperatingstatementundermarginalcosting. f) Reconciletheprofitsunderabsorptioncostingandmarginal costing.
64
Answers
a) Manufacturingoverheadabsorptionrate=$50perunit b) Fixedmanufacturingoverheadabsorbed=$3,300,000 c) Fixedmanufacturingoverheadoverabsorbedorunder absorbed=$300,000 d) Profitunderabsorptioncosting=$1,600,000 e) Profitundermarginalcosting=$1,400,000 f) Differenceinprofitsisduetofixedmanufacturingoverhead absorbedinclosinginventoryamountingto$200,000
65
AdvantagesofAbsorptionCosting
Itisconsistentwiththematchingconceptin whichmanufacturingcostsofsalesare matchedwiththesalesrevenue.Thisiswhy financialreportingstandardrequires absorptioncosting. Itfacilitatescostpluspricingstrategy.Inthe longrunforsurvivalandprofitability,prices mustcoverfixedcosts.
66
DisadvantagesofAbsorptionCosting
Absorptionofmanufacturingfixedoverheads toproductunitsbymeansofoverhead absorptionratecansometimesbearbitrary. Reportedprofitscanbemanipulatedby adjustinginventorylevelintheshortrun.For example,reportedprofitcanbeboostedby inventorypilingattheyearend.
67
AdvantagesofMarginalCosting
Itfacilitatesvariousshorttermdecisions making,e.g.breakevenanalysis. Itisrelativelysimpleinthesensethatitavoids overheadapportionmentandabsorption problems.
68
DisadvantagesofMarginalCosting
Segregationofmanufacturingoverheadsinto fixedandvariableelementscansometimesbe difficultandimpracticable. Itgivesthewrongimpressionthatfixed manufacturingoverheadshaveno relationshipwiththemanufacturingbecause itisexcludedfromproductcosts.
69
FurtherReadings
Burgstahler,D.,Horngren,C.,Schatzberg,J.,Stratton,W.,&Sundem, G.(2008).IntroductiontoManagementAccounting,14thed. UpperSaddleRiver:PrenticeHall.Chapters4&13. Drury,C.(2008).ManagementandCostAccounting,7thed.London: SouthWesternCengage Learning.Chapters7&10. Horngren,C.T.,Datar,S.M.,Foster,G.,Raian,M.&Ittner,C.(2009). CostAccounting:AManagerialEmphasis,13thed.UpperSaddle River:PrenticeHall.Chapters5&9. Lucey,T.(2009).Costing,7thed.London:SouthWesternCengage Learning.Chapter19.
70