Session 7
Session 7
Session 7
Cost Accounting
Chapter 9
Inventory Costing
and
Capacity Analysis
Session 7
Prof. Jorge Merladet
Copyright © 2018, 2016, 2015 Pearson Education, Ltd. All Rights Reserved.
Notes
Absorption $/unit $ units
standard and Jan Feb March Selling price per unit 3,500
BOP 0 100 100 Var manuf costs 950
Variable Production 1,400 1,375 1,430 Var operating costs 725
Sales 1,300 1,375 1,455 Fixed manuf costs 350 490,000
accounting EOP 100 100 75 Fixed operating costs 120,000
Crystal Clear Corporation’s actual data Standard level of production 1,400
relating to January, February, and March
Allocation ----> Deviation or variance -----------> Adjustment
2017 are as follows: February Underallocation Unfavourable variance/deviation Add cost to compensate
January February March
March Overallocation Favorourable deviation Lower cost to compensate
Unit data
Beginning entry 0 100 100
Production 1,400 1375 1430
Sales 1,300 1375 1455
Variable costs
Manufacturing $ 950
cost per unit Variable Absorption
produced
Operating cost $725
Finished goods inventory Finished goods inventory
per unit sold
Fixed costs Jan Feb March Jan Feb March
Manufacturing $490,000 $490,000 $490,000 BOP 0 95,000 95,000 BOP 0 130,000 130,000
costs + COGM 1,330,000 1,306,250 1,358,500 + COGM
Operating costs $120,000 $120,000 $120,000
- COGS 1,235,000 1,306,250 1,382,250 - COGS
= EOP 95,000 95,000 71,250 = EOP 130,000 130,000 97,500
2017 under (a) variable costing and (b) Fixed operating costs 120,000 120,000 120,000 Fixed operating costs 120,000 120,000 120,000
Operating income 1,762,500 1,899,375 2,045,375 Operating income 1,797,500 1,899,375 2,036,625
absorption costing.
• For every period, Absorption computes the FMC of the period as a manufacturing
expense, as opposed to that Absorption Standard or Normal computes as
manufacturing cost…
FMCU x units produced
• And then, when it comes to COGS, at the end of the period, needs to adjust…
Adjustment = Actual FMC – Allocated FMC
• … which is called
Production-volumen Variance
Direct
Fixed Manufacturing Actual
costs
Actual Normal
Wait Real time Adjust to be
Budget accounting real precise
until the end of the anticipates future
month, the quarter or quantities and prices
prices known, but at end of the
the year quantities unknown
period
Account at the
end of the 1. Forecast 2. Allocate 3. Adjust
period
COGS +
real quantities, FMCbudget / Adjustment
FMCallocated=
real prices unitsbudget in the income
statement
Adjustment:
FMCUbudget x FMCactual –
FMCUbudget unitsactual
FMCallocated
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Adjustment
FMC
Actual
Underallocation Overallocation
or
(=unfavourable) (=favourable)
FMC
Allocated
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Reconcile results
Denominator Issues
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2020 2021
BOP 0 2 000
Produced 8 000 5 000
Sold 6 000 6 500
EOP 2 000 500
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Capacity levels
For standard / normal costing
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3. Under a cost-based
pricing system, what are
Capacity Level: the negative aspects of a
master-budget
Costing & Pricing, Capacity Utilisation denominator level? What
are the positive aspects?
denominator-level concepts.
fixed manufacturing overhead
and helps using it for other production or eliminate it. Working at master
A. Theoretical: FMCU = $/u 60, unrealistic small cost,
Strassen, of using either
theoretical capacity or
for pricing.
B. Practical: maximum number of units that can be E. If competitors manage capacity more effectively: risk
produced. The cost of a unit, if working and full of downward spiral.
practical capacity, that is the minimal cost of
supplying capacity. FMCU= $/u 90.
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Capacity Level:
Performance, Financial Acc & Write-off
A. Performance evaluation: a mid level marketing
manager with no say in the decision to build long-term
capacity, should assess the cost of planed unused
capacity $360,000 as something outside his/her
scope, a cost for long term growth, while the rest,
$720,000 a cost of meeting his/her demand.
Assuming the budget is met, we will produce 8,000 units, check the
variance:
B. Financial reporting: the amount passed on to
inventory or shown as a cost of the period changes.
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Disadvantages: Disadvantages:
18 000
12 000
10 000
8 000
1. Theoretical capacity (maximum possible output)
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What we learned today
Absorption accounting, standard accounting and budgeted FCU
Variable Accounting
Read Ch9: p.349-354 (Absorp & Var Acc), p. 364-372 (Capacity) & p. 358-361 Automakers
Everyone: read Terminus Hotel (from syllabus) & submit you two pager on BB (one per
group) before 5 pm the previous day
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