Tutorial 4 - summary

Pertinent points to note. Components of COS and Expenses in the Income Statement under the two costing systems (AC, VC). Reflecting the differences in NOI reported that lies primarily in the FMOH deferred. Effect on profit Observations/inferences.

Tutorial 4 Pertinent Points on Absorption/Variable Costing

Difference between the income reported under AC as against VC is in the deferred fixed MOH applied to the inventory change . i.e.
( AC - VC ) = FMOH per unit X change in Inventory
(CI OI)

Change in Invy = Diff in Income unit FMOH cost

(CI OI)

units Produced = units Sold change in inventory(= closing inventory opening inventory)

Composition of COS & expenses

Under VC Cost of Sales COGS (as variable costs) Variable S,G&A Operating Expenses Fixed MOH Fixed S,G&A * Under AC Cost of SalesCOGS (as variable costs) Fixed MOH on units sold
(FMOH applied to the FG sold)

Operating Expenses Total S,G&A (Fixed + Variable)

Comparison
Variable Costing Absorption Costing Differences

July
Units sold Units produced Opening inventory Ending inventory Sales Less: Variable expensesProduct cost - COGS @ $22 per unit Variable selling @ $3 ea Total variable costs/expenses Contribution margin Less: Fixed expenses: Fixed mfg overhead Fixed selling & admin exp. Total fixed expenses Net operating income (loss) Ending Invy 2,500 units @$22 ea 315,000 245000 560,000 ($35,000) Total Selling & admin exp. Total operating expenses Net operating income (loss) Ending Invy 2,500 units @$40 ea 15,000 17,500 0 2,500 $900,000 Sales Less: Cost of goods sold Product cost - COGS @ $22 per unit Fixed OH @ $18 ea unit Total costs Gross Margin Less: Operating expenses: Units sold Units produced

July
15,000 17,500 0 2,500 $900,000

($330,000) ($45,000) ($375,000) $525,000

($330,000) ($270,000) ($600,000) $300,000

$290,000 $290,000 $10,000 ($45,000)

55,000

$ 100,000

45,000

Fixed OH deferred in the change in Inventory.

Effect on Profit under AC vs VC

Year 1 Year 2 40,000 60,000 Year 3 50,000 40,000 20,000 10,000

Sales units (S) Production units (P) Opening Inv'y (OI) Closing Inv'y (CI)
Relationship :-

50,000 50,000

20,000

Production vs Sales
Closing Inv'y vs Opening Inv'y

P=S CI = OI

P>S CI > OI

P<S CI < OI

Effect on Profit under AC vs VC

AC = VC

AC > VC

AC < VC

Observations
Scenario1 Absorption costing NOI = Variable costing NOI

AC vs VC
Scenario 3 Absorption costing NOI < Variable costing NOI

Scenario 2 Absorption costing NOI > Variable costing NOI

Production = Sales Inventories remain the same/unchanged

Production > Sales

Production < Sales

Inventories grow

Inventories shrink

Is Variable costing same as Directing costing?

The term direct costing is a misnomer. Variable costing is not synonymous to direct costing. Under variable costing, the variable costs of direct material, direct labor, and variable overhead are treated as inventoriable product costs. Not all variable costs are direct costs, but they are treated as product costs under the variable-costing method. For example, the costs of running machinery used in manufacturing are not direct costs, but they are likely to be variable or semi-variable. Variable costing includes as inventoriable costs not only direct manufacturing costs but also some indirect costs (variable indirect manufacturing costs). Any fixed direct manufacturing costs, and any direct non-manufacturing costs (either variable or fixed), are excluded from inventoriable costs. Hence, under variable costing fixed MOH costs are not treated as product costs.

Tutorial 5 Assignment Group K15, & K17

Team 1 = Qn 3, Problem 10-26 Team 2 = Qn 1 & 2, Problem 10-11 & 10-19, Team 3 = Qn 4, Supple Qn 1, Team 4 = Qn 5, Supple Qn 2

Group K 16
Teams 1 to 5 - Question 1 to 5 respectively

Tutorial 4 Assignment Group K15, & K17

Team 1 = Qn 1 & 2, Supple Question on ABC & Problem 7-17 Team 2 = Qn 3, Problem 5-14, Team 3 = Qn 4, Problem 5-16, Team 4 = Qn 5, Case 5-20

Group K 16
Teams 1 to 5 - Question 1 to 5 respectively