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Inventory Costing and Capacity Analysis

Inventory Costing and Capacity Analysis. JOIN KHALID AZIZ. ECONOMICS OF ICMAP, ICAP, MA-ECONOMICS, B.COM. FINANCIAL ACCOUNTING OF ICMAP STAGE 1,3,4 ICAP MODULE B, B.COM, BBA, MBA & PIPFA. COST ACCOUNTING OF ICMAP STAGE 2,3 ICAP MODULE D, BBA, MBA & PIPFA. CONTACT: 0322-3385752 0312-2302870

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Inventory Costing and Capacity Analysis

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  1. Inventory Costingand Capacity Analysis

  2. JOIN KHALID AZIZ • ECONOMICS OF ICMAP, ICAP, MA-ECONOMICS, B.COM. • FINANCIAL ACCOUNTING OF ICMAP STAGE 1,3,4 ICAP MODULE B, B.COM, BBA, MBA & PIPFA. • COST ACCOUNTING OF ICMAP STAGE 2,3 ICAP MODULE D, BBA, MBA & PIPFA. • CONTACT: • 0322-3385752 • 0312-2302870 • R-1173,ALNOOR SOCIETY, BLOCK 19,F.B.AREA, KARACHI, PAKISTAN

  3. Fresh classes of icmap stage 1-3 • Fundamentals of fa(1) • Cost accounting(2) • Financial accounting(3) • Cost accounting-appraisal(3) • From 22nd February, 2010

  4. FRESH CLASSES OF MA-ECONOMICS • PREVIOUS- MICRO ECONOMICS • STATISTICS • FINAL – MACRO ECONOMICS • FROM 15TH FEBRUARY 2010

  5. Learning Objective 1 Identify what distinguishes variable costing from absorption costing.

  6. Inventory-Costing Methods The difference between variable costing and absorption costing is based on the treatment of fixed manufacturing overhead.

  7. Variable Costing Direct Materials Variable Factory Labor Variable Overhead Work in Process Inventory

  8. Variable Costing Work in Process Inventory Finished Goods Inventory Fixed Factory Labor Cost of Goods Sold Income Summary

  9. Learning Objective 2 Prepare income statements under absorption costing and variable costing.

  10. Comparing Income Statements The following data pertain to Davenport Fixtures: Year 1Year 2Total Beginning inventory -0- 2,000 -0- Produced 10,000 11,500 21,500 Sold 8,00013,00021,000 Ending inventory 2,000 500 500

  11. Comparing Income Statements The following information is on a per unit basis: Sales price: Rs71.00 Variable manufacturing costs: Direct materials: Rs 4.00 Direct manufacturing labor: Rs21.00 Indirect manufacturing costs: Rs24.00 Fixed manufacturing costs: Rs 4.50

  12. Comparing Income Statements(Absorption Costing) Total fixed production costs are Rs54,000 at a normal capacity of 12,000 units. Fixed nonmanufacturing costs are Rs30,000 per year. Variable nonmanufacturing costs are Rs2.00 per unit sold.

  13. Comparing Income Statements(Absorption Costing) Revenues Rs568,000 Cost of goods sold 428,000 Volume variance (U) 9,000 Gross margin Rs131,000 Nonmanufacturing costs 46,000 Operating income Rs 85,000

  14. Comparing Income Statements(Absorption Costing) Revenues for Year 1 are Rs568,000. What is the cost of goods sold? 8,000 × Rs49 = Rs392,000 What is the manufacturing contribution margin? Rs568,000 – Rs392,000 = Rs176,000 Net contribution margin = Rs160,000

  15. Comparing Income Statements (Variable Costing) Revenues Rs568,000 Cost of goods sold 392,000 Variable nonmanufacturing costs 16,000 Contribution margin Rs160,000 Fixed manufacturing costs 54,000 Fixed nonmanufacturing costs 30,000 Operating income Rs 76,000

  16. Learning Objective 3 Explain differences in operating income under absorption costing and variable costing.

  17. Operating Income(Absorption Costing) What are revenues for Year 2? 13,000 × Rs71 = Rs923,000 What is the cost of goods sold? 13,000 × Rs53.50 = Rs695,500 Is there a volume variance? (12,000 – 11,500) × Rs4.50 = Rs2,250 underallocated fixed manufacturing costs

  18. Operating Income(Absorption Costing) What is the gross margin? Rs923,000 – (Rs695,500 + Rs2,250) = Rs225,250 What are the nonmanufacturing costs? 13,000 units sold × Rs2.00 = Rs26,000 variable costs + Rs30,000 fixed costs = Rs56,000

  19. Operating Income(Absorption Costing) What is the operating income before taxes? Rs225,250 – Rs56,000 = Rs169,250 What is the operating income for the two years combined? Rs85,000 + Rs169,250 = Rs254,250

  20. Income Statements (Absorption Costing) Year 1Year 2 Combined Revenues Rs568,000 Rs923,000 Rs1,491,000 Cost of goods sold 428,000 695,500 1,123,500 Volume variance (U) 9,000 2,250 11,250 Gross margin Rs131,000 Rs225,250 Rs 356,250 Nonmfg. costs 46,000 56,000 102,000 Operating income Rs 85,000 Rs169,250 Rs 254,250

  21. Operating Income(Variable Costing) Revenues for Year 2 are Rs923,000. What is the cost of goods sold? 13,000 × Rs49 = Rs637,000 What is the manufacturing contribution margin? Rs923,000 – Rs637,000 = Rs286,000

  22. Operating Income(Variable Costing) What is the net contribution margin? Rs286,000 – Rs26,000 variable nonmanufacturing costs = Rs260,000 net contribution margin What is the operating income before taxes? Rs260,000 – Rs54,000 fixed manufacturing costs – Rs30,000 fixed nonmanufacturing costs = Rs176,000

  23. Income Statements(Variable Costing) Year 1Year 2Combined Revenues Rs568,000 Rs923,000 Rs1,491,000 Cost of goods sold 392,000 637,000 1,029,000 Mfg. contr. marginRs176,000 Rs286,000 Rs 462,000 Variable nonmfg. 16,000 26,000 42,000 Net contr. margin Rs160,000 Rs260,000 Rs 420,000

  24. Income Statements(Variable Costing) Year 1Year 2Combined Net contr. margin Rs160,000 Rs260,000 Rs420,000 Fixed mfg. costs 54,000 54,000 108,000 Fixed nonmfg. costs 30,000 30,000 60,000 Operating income Rs 76,000 Rs176,000 Rs252,000

  25. Comparison of Variableand Absorption Costing Variable costing operating income Year1: Rs76,000 Absorption costing operating income Year1: Rs85,000 Absorption costing operating income is Rs9,000 higher. Why?

  26. Comparison of Variableand Absorption Costing Production exceeds sales in Year 1. The 2,000 units in ending inventory are valued as follows: Absorption costing: 2,000 × Rs53.50 = Rs107,000 Variable costing: 2,000 × Rs49.00 = Rs 98,000 Difference: Rs 9,000

  27. JOIN KHALID AZIZ • ECONOMICS OF ICMAP, ICAP, MA-ECONOMICS, B.COM. • FINANCIAL ACCOUNTING OF ICMAP STAGE 1,3,4 ICAP MODULE B, B.COM, BBA, MBA & PIPFA. • COST ACCOUNTING OF ICMAP STAGE 2,3 ICAP MODULE D, BBA, MBA & PIPFA. • CONTACT: • 0322-3385752 • 0312-2302870 • R-1173,ALNOOR SOCIETY, BLOCK 19,F.B.AREA, KARACHI, PAKISTAN

  28. Comparison of Variableand Absorption Costing Variable costing operating income Year 2: Rs176,000 Absorption costing operating income Year 2: Rs169,250 Variable costing operating income is Rs6,750 higher. Why?

  29. Comparison of Variableand Absorption Costing Sales exceeded units produced in Year 2. 13,000 – 11,500 = 1,500 decrease in inventory Absorption costing: 1,500 × Rs53.50 = Rs80,250 Variable costing: 1,500 × Rs49.00 = Rs73,500 Higher cost of goods sold under absorption costing: Rs 6,750

  30. Comparison of Variableand Absorption Costing Variable costing combined net income: Rs252,000 Absorption costing combined net income: Rs254,250 Absorption costing is higher by Rs2,250 500 units in inventory × Rs4.50 = Rs2,250

  31. Comparison of Variableand Absorption Costing Absorption costing operating income – Variable costing operating income EQUALS Fixed manufacturing costs in ending inventory under absorption costing – Fixed manufacturing costs in beginning inventory under absorption costing

  32. Learning Objective 4 Understand how absorption costing can provide undesirable incentives for managers to build up finished goods inventory.

  33. Inventory Buildup Assume that Davenport Fixtures produced 4,400 units in Year 1 and sold 4,100. What is the production volume variance? (12,000 – 4,400) × Rs4.50 = Rs34,200 U What is the net operating income or loss for the period?

  34. Inventory Buildup Revenues (4,100 × Rs71) Rs291,100 Cost of goods sold (4,100 × Rs53.50) 219,350 Volume variance 34,200 Gross margin Rs 37,550 Nonmanufacturing costs 38,200 Net loss Rs 650

  35. Inventory Buildup How many units are in ending inventory? 4,400 – 4,100 = 300 How much cost is in ending inventory? 300 × Rs53.50 = Rs16,050

  36. Inventory Buildup Suppose that management decides to produce 9,000 units next year. Sales remain the same (4,100 units). What is the volume variance? (12,000 – 9,000) × Rs4.50 = Rs13,500 U What is the operating income or loss?

  37. Inventory Buildup Revenues (4,100 × Rs71) Rs291,100 Cost of goods sold (4,100 × Rs53.50) 219,350 Volume variance 13,500 Gross margin Rs 58,250 Nonmanufacturing costs 38,200 Net income Rs 20,050

  38. Inventory Buildup How many units are in ending inventory? 300 + 9,000 – 4,100 = 5,200 How much cost is in ending inventory? 5,200 × Rs53.50 = Rs278,200

  39. Learning Objective 5 Differentiate throughput costing from variable costing and absorption costing.

  40. Throughput Costing Revenues Rs568,000 Variable direct materials cost of goods sold 32,000 Throughput contribution margin Rs536,000 Manufacturing costs 504,000 Nonmanufacturing costs 46,000 Operating loss Rs 14,000

  41. Throughput Costing Manufacturing Costs: Labor Rs21.00 × 10,000 Rs210,000 Indirect costs Rs24.00 × 10,000 240,000 Fixed costs 54,000 Total manufacturing costs Rs504,000 What are other nonmanufacturing costs for the year?

  42. JOIN KHALID AZIZ • ECONOMICS OF ICMAP, ICAP, MA-ECONOMICS, B.COM. • FINANCIAL ACCOUNTING OF ICMAP STAGE 1,3,4 ICAP MODULE B, B.COM, BBA, MBA & PIPFA. • COST ACCOUNTING OF ICMAP STAGE 2,3 ICAP MODULE D, BBA, MBA & PIPFA. • CONTACT: • 0322-3385752 • 0312-2302870 • R-1173,ALNOOR SOCIETY, BLOCK 19,F.B.AREA, KARACHI, PAKISTAN

  43. Nonmanufacturing Costs: Variable Rs2.00 × 8,000 Rs16,000 Fixed 30,000 Total Rs46,000 Throughput Costing

  44. Variable costing operating income: Rs76,000 Throughput costing operating loss: Rs14,000 Difference in operating income: Rs90,000 Throughput Costing How can this difference be explained?

  45. Throughput Costing The 2,000 units in ending inventory are valued as follows: Variable 2,000 × Rs49 = Rs98,000 Throughput 2,000 × Rs4 = Rs8,000 Rs90,000 difference

  46. Absorption costing operating income: Rs85,000 Throughput costing operating loss: Rs14,000 Difference in operating income: Rs99,000 Throughput Costing How can this difference be explained?

  47. Throughput Costing The 2,000 units in ending inventory are valued as follows: Absorption 2,000 × Rs53.50 = Rs107,000 Throughput 2,000 × Rs4 = Rs8,000 Rs99,000 difference

  48. Comparison of InventoryCosting Methods Actual Costing Variable Costing Absorption Costing Throughput Costing

  49. Comparison of InventoryCosting Methods Normal Costing Variable Costing Absorption Costing Throughput Costing

  50. Comparison of InventoryCosting Methods Standard Costing Variable Costing Absorption Costing Throughput Costing

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