Chapter 7 Notes
Page 1
Variable Costing
Absorption
As we have seen in previous chapters, when you manufacture your own inventory, the cost of that inventory includes all of the costs associated with running the factory that produces the inventory.
Generally, no part of the factory cost is expensed.
Instead, it is capitalized as the cost of the inventory produced. It is only expensed when the inventory is sold. At that point the cost of the inventory becomes
Cost of Goods Sold. This system is referred to as
Absorption Costing. It is also know as “Full Costing” and
“Full-Absorption Costing”.
The thought is that the inventory absorbs all of the factory costs fully.
As we have seen, inventory costs are made up of the following under
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Assuming that Lucy sold all of the units that it produced, you would have the following
Income Statements produced by the two methods:
Absorption Costing Income Statement
Variable Costing Income Statement
(25x10K)
(25x10K)
Sales Revenue:
$250,000
Sales Revenue: $250,000
(15x10K) Less VC:
COGS:
-150,000
(10x10K)
VCOGS:
-100,000
VSG&Adm:
-30,000
Gross Margin:
$100,000
Contrib.Marg:
$120,000
(30K+30K) Less FC:
Less: SG&Adm:
-60,000
F MO/H:
-50,000
F SG&Adm:
-30,000
Oper. Profits:
$40,000
Oper. Profits:
$40,000
As you can see, both methods produce the same Operating Profits. (This statement assumes that either: (i) your manufacturing costs are the same in the current period and prior periods, or (ii) you are using LIFO).
On the other hand, if the number of units that you sell differs from the number of units produced in this period, then the Operating Profits reported using the two methods will differ. Please send comments and corrections to me at mconstas@csulb.edu
Chapter 7 Notes
Page 4
Assume that Lucy sold only one-half of its production. Because the number of units sold are one-half of the units that were sold previously then Lucy’s Variable Costs and
Sales
In our second assumption, instead of using the cost of goods per cases in 1986, we try to use the percentage it counts in the total expenses which is 50.4% and to find the sales needed to break-even. The detail of the calculation is shown in the answer for questions d. The result is that 95,635, a little bit higher than the estimated sales of 90,000.
1) If a monopolist's price is $65 a unit and its marginal cost is $25 for the last unit produced,
Martinez Company’s relevant range of Production is 7,500 to 12,500 units. When it produces and sells 10,000 units, its unit costs are as follows:
So, in order to determining the number of items actually sold here is how you calculate it:
The amount of extra sales that would be required to cover this cost of 300,000 would be
Booker Jones “other operating costs” increased from 1960 to 1961 primarily because of the cost of the barrels used, the occupancy costs and the warehousing costs. This is understandable because Booker Jones decided to increase production which would require 20,000 more barrels. If the cost of barrels is $31.50, then these 20,000 barrels would have cost $630,000. This is precisely why the cost of barrels used went up from 1960 to 1961. If these barrels were not considered an “Other Operating Cost” but instead
The overhead spending variance and the overhead efficiency variance are useful only if variable overhead
a. You should assume that operating costs will grow annually at 1% in real terms.
Inventory, 1/1/X6 |24,000 units | |Units manufactured |80,000 | |Units sold |82,000 | |Inventory, 12/31/X6 |22,000 units | |Manufacturing costs: | |Direct materials |$3 per unit | |Direct labor |$5 per unit | |Variable factory overhead |$9 per unit | |Fixed factory overhead |$280,000 | |Selling & administrative expenses: | |Variable |$2 per unit | |Fixed |$136,000 | |
3- As we can see the company would loss 0.52 cent per 1 kg if it decides to sell at 6.85 price and allocates the fixed expenses at 1.20 per 1 kg.
The items with a 12 month entries incur the cost irrespective of any production activities, while the items with 10 month
Solo Company is a small merchandising firm. During the next month, the company expects to sell 500 units. The company has the following revenue and cost structure:
(cost of goods manufactured in 2008/ sales value for units produced in 2008) * ending inventory 2008
sales volume ⎞ ⎛ unit variable sales volume ⎞ ⎛ unit fixed ⎜ ⎟ −⎜ ⎟ − ⎜ sales price × ⎟ ⎜ expense × ⎟ expenses = 0 in units ⎠ ⎝ in units ⎠ ⎝
LECTURE OUTLINE 1 2 2.1 2.2 2.3 2.4 2.5 2.6 3 3.1 3.2 3.3 INTRODUCTION SHORT-RUN THEORY OF COST Distinction between fixed cost and variable cost Total cost Marginal cost Average cost Relationship between marginal cost and average cost Optimum capacity LONG-RUN THEORY OF COST Cost minimisation in the long run Long-run average cost Productive efficiency