Cost accounting
Rawan ageeli
module_2-_acc315_latestpptx_.pptxACCT 315– COST ACCOUNTING
MODULE 2 – INVENTORY COSTING
(CHAPTER 9)
DR WAN AZMIMI WAN MOHAMED
YANBU UNIVERSITY COLLEGE
Management Science Department
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1
LEARNING OBJECTIVES
Distinguish variable costing from absorption costing
Compute income under absorption costing and variable costing and explain the difference in income
Analyze how absorption costing can provide undesirable incentives for managers to build up inventory
Differentiate throughput costing from variable costing and absorption costing
Slide 2
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Inventory Costing Choices: Overview
Absorption costing—product costs are capitalized; period costs are expensed.
Variable costing—variable product and period costs are capitalized; fixed product and period costs are expensed.
Throughput costing—only direct materials are capitalized; all other costs are expensed.
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Costing Comparison
Variable costing is a method of inventory costing in which only variable manufacturing costs are included as inventoriable costs.
Absorption costing is a method of inventory costing in which all variable manufacturing costs and all fixed manufacturing costs are included as inventoriable costs.
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Differences in Income
Operating income will differ between absorption and variable costing.
The amount of the difference represents the amount of fixed product costs capitalized as inventory under absorption costing, and expensed as a period costs under variable costing.
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Comparative Income Statements
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Comparative Income Statements—Three Years
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Comparative Income Effects
| Variable Costing | Absorption Costing | |
| Are fixed product costs inventoried? | No | Yes |
| Is there a production-volume variance? | No | Yes |
| Are classifications between variable and fixed costs routinely made? | Yes | Infrequently |
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Comparative Income Effects
| Variable Costing | Absorption Costing | |
| How do changes in unit inventory cost affect operating income if…? | ||
| Production = Sales | Equal | Equal |
| Production > Sales | Lower | Higher |
| Production < Sales | Higher | Lower |
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Comparative Income Effects
| Variable Costing | Absorption Costing | |
| What are the effects on cost-volume-profit for a given level of fixed costs and a given contribution margin per unit? | Driven by: unit level of sales | Driven by: Unit level of sales Unit level of production Chosen denominator level |
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10
Performance Issues and Absorption Costing
Managers may seek to manipulate income by producing too many units.
Production beyond demand will increase the amount of inventory on hand.
This will result in more fixed costs being capitalized as inventory.
That will leave a smaller amount of fixed costs to be expensed during the period.
Profit increases, and potentially, so does a manger’s bonus.
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Inventories and Costing Methods
One way to prevent the unnecessary buildup of inventory for bonus purposes is to base manager’s bonuses on profit calculated using variable costing.
Drawback: complicated system of producing two inventory figures—one for external reporting and the other for bonus calculations.
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Other Manipulation Schemes Beyond Simple Overproduction
Deciding to manufacture products that absorb the highest amount of fixed costs, regardless of demand (“cherry-picking”)
Accepting an order to increase production, even though another plant in the same firm is better suited to handle that order
Deferring maintenance
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Management Countermeasures for Fixed Cost Manipulation Schemes
Careful budgeting and inventory planning
Incorporate an internal carrying charge for inventory
Change (lengthen) the period used to evaluate performance
Include nonfinancial as well as financial variables in the measures to evaluate performance
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14
Income Effects of Inventory Buildup
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15
Extreme Variable Costing: Throughput Costing
Throughput costing (super-variable costing) is a method of inventory costing in which only direct material costs are included as inventory costs. All other product costs are treated as operating expenses.
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Throughput Costing Illustrated
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Costing Systems Compared
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Slide 19
END OF MODULE 2
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