Cma P1 Su6

Front 1

2 ways of treating fixed production costs

Back 1

1) treat fixed production cost as part of cost of unit (absorption costing)

or

2) treat fixed overhead costs as period costs (variable costing)

Front 2

What is needed for external reporting regarding costs

Back 2

For external reporting purposes, all manufacturing costs, fixed and variable need to be included in cost of each unit

Front 3

How to arrive at gross margin under Absorbtion costing?

Back 3

Sales minus COGS (all production costs for each unit

Front 4

Calculation of Operational income under AC

Back 4

Gross margin minus Selling and Admin Expenses

Front 5

Product cost under VC

Back 5

Only variable part of manufacturing costs?

Front 6

Next step under VC

Back 6

Sales minus variable manufacturing costs minus variable part of Seeling and administrative expenses = contribution margin

Front 7

Justification of ac; main --> advantage?

Back 7

Management cannot manipulate operating income

Front 8

how are fixed manufacturing costs treated under AC?

Back 8

treated as a period cost

Front 9

Describe model Absorption Costing

Back 9

Operating Income

• Sales -/- Cost of Goods Sold = GM
  

• GM -/- Selling and Admin = Operating income
  

• Cost of Goods Sold = BI + Product cost - EI
  

• product cost = variable costs + fixed manufacturing cost
  

Front 10

Describe model Variable Costing

Back 10

Operating Income = Contribution Margin less fixed manufacturing costs less fixed S&A expenses

Contribution Margin = Sales minus Cost of Goods Sold Minus variable S&A

Cost of Goods Sold = BI + Production Cost -/- EI

Production Cost = Variable Production Costs

Front 11

Explain difference in Operating Income When Movement in Inventory = equal, inventory increases, inventory decreases

Back 11

When inventory increases

Front 12

Why do many companies prefer variable costing?

Back 12

• Perverse effect of increased inventory
  
• Under VC operating income will always move in same direction
  

Front 13

Benefits for management of VC

Back 13

Better insight in variable costs and fixed costs

No allocation of fixed costs necessary

Front 14

Benefits of VC

Back 14

1. Benefits for management
2. Production manager cannot manipulate income
3. the cost data for profit planning and decision making are readily available
4. Profit and losses have a relationship with sales volumes and are not affected by over production or under production
5. Less confusion for management
6. Cause effect relationship Sales and Profit
7. Full impact of fixed costs shown
8. Fixed manufactoring costs is more clearly correlated to capacity to produce than to the production of individual units

Front 15

Further Aspect of Variable Costing

Back 15

1. Better
   

Front 16

!! A manufacturing process normally produces defective units equal to 1% of production. Defective units are subsequently reworked and sold. The cost of reworking these defective units should be charged to:

Back 16

In a process-costing application, normal rework is customarily charged to overhead. In a job-order costing application, normal rework costs related to specific jobs are usually charged to the work-in-process account for the given job, not the control account.