Managerial Accounting

Transcription

1 Managerial Accounting Group 5 4A 卓佳穎 4A 李佳容 4A1A0082 潘惠靜 4A1A0025 蔡季芳

2 Video Absorption Costing vs. Variable Costing

3 Accounting Principles Absorption Costing Variable Costing Direct material Product Cost Direct labor Variable Overhead Product Cost Fixed Overhead Period cost Operating expenses-variable Operating expenses-fixed Period cost

4 Accounting Principles Absorption Costing - Maybe there will lead to a risk that in order to get dividends and bonuses, production of high profits in the report, but the actual cost of production were postponed to the following year. Variable Costing - Operating profit with sales volume increase or decrease lift. But it does not meet the traditional concept of cost. - The American Institute of CPAs and CASB are expressly provided by the full-cost method carried out inventory valuation

5 CASE STUDY

6 abstract The new president of Graham, Inc., Tom Graham, Jr. was very pleased with the turnaround in sales in August. August sales were $200,000 greater than in July, so he had every reason to expect the income statement to show a healthy increase over July s profit of $ 14,036. When the August report came in showing a loss of $22,928, he was shocked.

7 abstract

8 abstract Graham called the controller, Andy Derrow, for an explanation. Derrow assured him that the figures were correct. The reason for the loss was that the company had reduced production levels well below normal. This resulted in an unabsorbed production volume variance which more than offset the impact of the increase in sales.

9 abstract Derrow reworked the August statement with other accounting principles and found that the loss turned into a profit.

10 Questions 1. Approximately how busy (relative to a normal month) was the factory in August?

11 Answers Overhead volume variance it refers to the variance between the cost of production caused by the different. And we see a unfavorable variance between the $ 107,480, representing a yield reduction caused by increased unit cost-sharing, which means that in August the plant is relatively busy.

12 Questions 2. Can you construct an income statement for a normal month under both absorption costing and direct costing? Analyze the profit variance for August versus a normal month.

13 Answers Absorption costing August July Variances Sales $1,347,000 $1,132,112 $214,888 Standard Cost of Goods Sold $712,000 $610,416 $101,584 Gross Margin $635,000 $521,696 $113,304 Less Manufacturing Variances Labor ($17,200) ($21,704) $4,504 Marerial $15,800 $20,324 ($4,524) Overhead Volume $107,480 ($1,788) $109,268 Spending $5,380 $8,692 ($3,312) Factory Overhand Profit before Administrative and selling Expenses $523,540 $516,172 $7,368 Selling Costs $380,736 $341,928 $38,808 Administrative Costs $165,732 $160,208 $5,524 Profit ($22,928) $14,036 ($36,964)

14 Answers Direct costing August July Variances Sales $1,347,000 $1,132,112 $214,888 Standard Cost of Goods Sold $492,000 $418,648 $73,352 Gross Margin $855,000 $713,464 $141,536 Less Manufacturing Variances Labor ($17,200) ($21,704) $4,504 Marerial $15,800 $20,324 ($4,524) Overhead Volume Spending $5,380 $8,692 ($3,312) Factory Overhand $270,280 $263,448 $6,832 Profit before Administrative and selling Expenses $580,740 $442,704 $138,036 Selling Costs $380,736 $341,928 $38,808 Administrative Costs $165,732 $160,208 $5,524 Profit $34,272 ($59,432) $93,704

15 Absorption costing Answers August production levels decreased Cost Variance analysis adjusted 60 times higher than normal, so even 19% more revenue can not improve the overall profit than usual, and even cause a loss. Direct costing Like August revenue was significantly higher than normal month, revenue increased by about 19 percent, but after removing the impact of fixed manufacturing costs, the cost variance is less than revenue, increased by only about 10%, The rate of increase in revenue over of cost increases, so that in August variable costing profit will be significantly higher than normal month.

16 Answers conclusion In August, the full cost method can be seen on a production level worse than normal month, so the fixed overhead allocated to each number on the product is large, and therefore increase revenue will not help anything. On variable costing, focusing on the level of sales, although lower production levels in August, but Increased sales volume levels, so revenue growth up, of course, profits also followed growing.

17 Questions 3. Be prepared to explain the profit differences shown in Exhibits 1 and 2 ($-22,928 vs. $+34,272) and in Exheditibit 3 ($+14,036 vs. $-59,432).

18 August -Table I & II Absorption costing Direct costing Sales 1,347,000 1,347,000 Standard Cost of Goods Sold (712,000) (492,000) Gross Margin 635, ,000 Less Manufacturing Variances Labor (17,200) (17,200) Marerial 15,800 15,800 Overhead Volume 107,480 Spending 5,380 (111,460) 5,380 (3,980) Overall Gross Margin 523, ,020 Selling Costs Sales Expenses 338, ,056 Sales Taxes 13,900 13,900 Freight Allowed 28,780 (380,736) 28,780 (380,736) Factory Overhand (270,280) Administrative Costs General and Administrative 108, ,060 Interest Expense 57,672 (165,732) 57,672 (165,732) Profit (22,928) 34,272

19 Answers August profits variance (Table I&II) Because of variable cost does not include fixed manufacturing overhead, so significantly less than the absorption costing. And than Cost variance analysis expense adjustments, where the only variance is the method takes into account the absorption costing of fixed manufacturing overhead, so the cost variance analysis on adjustment will adjust the fixed manufacturing overhead, so cost becomes high.

20 Answers August profits variance (Table I&II) Although variable costs need to be deducted fixed manufacturing costs incurred during the period, but this fee includes only fixed manufacturing overhead occurred this month, also significantly less than the fixed manufacturing overhead under the full cost method required amortization. Therefore all of the absorption costing of profit will be reduced a lot.

21 July -Table III Absorption costing Direct costing Sales 1,132,112 1,132,112 Standard Cost of Goods Sold (610,416) (418,648) Gross Margin 521, ,464 Less Manufacturing Variances Labor (21,704) (21,704) Marerial 20,324 20,324 Overhead Volume (1,788) Spending 8,692 (5,524) 8,692 (7,312) Overall Gross Margin 516, ,152 Selling Costs (341,928) (341,928) Factory Overhand (263,448) Administrative Costs (160,208) (160,208) Profit 14,036 (59,432)

22 Answers July profit variance (Table III) The August profits variance of COGS variable costing would certainly lower the absorption costing, because they do not contain fixed manufacturing overhead. And after expense adjustments cost variance analysis is a major variance in profit, because under variable costing fixed manufacturing costs will be recognized during the whole occurrence, reduce profits of Variable Costing. But absorption costing would be spread unsold inventory and let reduce a lot of costs, so profits are higher than variable costing.

23 Questions 4. Could the problem in the case ever arise with respect to annual income statements? Answers The problem, of course will continue to be repeated,unless the level of production and sales levels are equal, it will not be such a problem.

24 Questions 5.From a managerial perspective, how does earn a profit? Which costing system best reflects the basic economics of the business?

25 Answers In the whole, have a good revenue, but also need to have good cost control, when the level of production was reduced unit costs will increase, so the best way is to maintain a certain level of production, and increase revenue in order to generate profits for the company. Variable costing is the best method reflects the economic efficiency of enterprises.

26 Answers Variable costing is the best method reflect the economic, as absorption costing can be reasonably assessed on all the costs to each product, rather than just focus on the impact of changes in variable cost.

27 Questions 6. What do you recommend? Recommendations in a short period with variable costing, cost more precise control, view operating performance. Long-term to the absorption costing mainly for the benefit of their overall planning. However, the provisions of GAAP use the absorption costing of preparation of the income statement,but also because the main purpose of financial statements is to report overall business during the year.

28 References Book : Cases in Cost Management A Strategic Emphasis by John K Shank PPT design : Video :