Professional Documents
Culture Documents
Learning Objective 1
Slide 2
Slide 3
Quick Check
Which
Which method
method will
will produce
produce the
the highest
highest values
values for
for
work
work in
in process
process and
and finished
finished goods
goods inventories?
inventories?
a.
a. Absorption
Absorption costing.
costing.
b.
b. Variable
Variable costing.
costing.
c.
c. They
They produce
produce the
the same
same values
values for
for these
these
inventories.
inventories.
d.
d. ItIt depends.
depends. .. ..
Slide 4
Quick Check
Which
Which method
method will
will produce
produce the
the highest
highest values
values for
for
work
work in
in process
process and
and finished
finished goods
goods inventories?
inventories?
a.
a. Absorption
Absorption costing.
costing.
b.
b. Variable
Variable costing.
costing.
c.
c. They
They produce
produce the
the same
same values
values for
for these
these
inventories.
inventories.
d.
d. ItIt depends.
depends. .. ..
Slide 5
$$
$$
Fixed
Fixed costs
costsper
per year:
year:
Manufacturing
Manufacturing overhead
overhead
Selling
Selling &&administrative
administrative expenses
expenses
$$150,000
150,000
$$100,000
100,000
25,000
25,000
10
10
33
Slide 6
Direct
Directmaterials,
materials, direct
directlabor,
labor,
and
and variable
variable mfg.
mfg. overhead
overhead
Fixed
Fixed mfg.
mfg. overhead
overhead
($150,000
($150,00025,000
25,000units)
units)
Unit
Unitproduct
productcost
cost
Absorption
Absorption
Costing
Costing
Variable
Variable
Costing
Costing
$$
10
10
$$
10
10
$$
66
16
16
$$
-10
10
Slide 7
Learning Objective 2
Prepare income
statements using both
variable and absorption
costing.
Slide 8
Income Comparison of
Absorption and Variable Costing
Lets assume the following additional information
for Harvey Company.
Slide 9
Absorption Costing
Slide 10
Variable Costing
Variable
manufacturing
Variable
VariableCosting
Costing
costs only.
Sales
Sales(20,000
(20,000$30)
$30)
Less
Lessvariable
variableexpenses:
expenses:
Beginning
$$
-Beginninginventory
inventory
Add
250,000
AddCOGM
COGM(25,000
(25,000$10)
$10)
250,000
Goods
250,000
Goodsavailable
availablefor
forsale
sale
250,000
Less
Lessending
endinginventory
inventory(5,000
(5,000$10)
$10) 50,000
50,000
Variable
200,000
Variablecost
costof
ofgoods
goodssold
sold
200,000
Variable
Variableselling
selling&&administrative
administrative
expenses
60,000
expenses(20,000
(20,000$3)
$3)
60,000
Contribution
Contributionmargin
margin
Less
Lessfixed
fixedexpenses:
expenses:
Manufacturing
$$150,000
Manufacturingoverhead
overhead
150,000
Selling
Selling&&administrative
administrativeexpenses
expenses 100,000
100,000
Net
Netoperating
operatingincome
income
McGraw-Hill Education (Asia)
$$600,000
600,000
All fixed
manufacturing
overhead is
expensed.
260,000
260,000
340,000
340,000
250,000
250,000
$$ 90,000
90,000
Slide 11
Learning Objective 3
Reconcile variable
costing and absorption
costing net operating
incomes and explain
why the two amounts
differ.
Slide 12
Absorption
Absorptioncosting
costing
Variable
Variable mfg.
mfg.costs
costs $$200,000
200,000
Fixed
120,000
Fixedmfg.
mfg.costs
costs
120,000
$$320,000
320,000
Variable
Variable costing
costing
Variable
Variable mfg.
mfg.costs
costs $$200,000
200,000
Fixed
-Fixedmfg.
mfg.costs
costs
$$200,000
200,000
Ending
Ending
Inventory
Inventory
Period
Period
Expense
Expense
$$ 50,000
50,000
30,000
30,000
$$ 80,000
80,000
$$
$$ 50,000
50,000
-$$ 50,000
50,000
$$
-150,000
150,000
$$150,000
150,000
$$
----
Total
Total
$$250,000
250,000
150,000
150,000
$$400,000
400,000
$$250,000
250,000
150,000
150,000
$$400,000
400,000
Slide 13
$$
90,000
90,000
30,000
30,000
$$ 120,000
120,000
Slide 14
25,000
25,000
30,000
30,000
5,000
5,000
$$
30
30
$$
10
10
$$
33
$$150,000
150,000
$$100,000
100,000
Slide 15
Direct
Directmaterials,
materials, direct
directlabor,
labor,
and
and variable
variable mfg.
mfg. overhead
overhead
Fixed
Fixed mfg.
mfg. overhead
overhead
($150,000
($150,00025,000
25,000units)
units)
Unit
Unitproduct
productcost
cost
Absorption
Absorption
Costing
Costing
Variable
Variable
Costing
Costing
$$
10
10
$$
10
10
$$
66
16
16
$$
-10
10
Slide 16
Absorption Costing
Unit product
Sales
Sales(30,000
(30,000 $30)
$30)
Less
Lesscost
costof
ofgoods
goodssold:
sold:
Beg.
Beg. inventory
inventory(5,000
(5,000 $16)
$16)
Add
AddCOGM
COGM (25,000
(25,000 $16)
$16)
Goods
Goodsavailable
available for
forsale
sale
Less
Lessending
endinginventory
inventory
Gross
Grossmargin
margin
Less
Lessselling
selling &&admin.
admin. exp.
exp.
Variable
Variable (30,000
(30,000 $3)
$3)
Fixed
Fixed
Net
Netoperating
operatingincome
income
cost.Absorption
AbsorptionCosting
Costing
$$900,000
900,000
$$ 80,000
80,000
400,000
400,000
480,000
480,000
-$$ 90,000
90,000
100,000
100,000
480,000
480,000
420,000
420,000
190,000
190,000
$$230,000
230,000
Slide 17
Variable Costing
Variable
manufacturing
costs only. Variable Costing
Variable Costing
Sales
$$900,000
Sales(30,000
(30,000 $30)
$30)
900,000
Less
Lessvariable
variable expenses:
expenses:
Beg.
$$ 50,000
Beg. inventory
inventory(5,000
(5,000 $10)
$10)
50,000
Add
250,000
AddCOGM
COGM(25,000
(25,000 $10)
$10)
250,000
All fixed
Goods
300,000
Goodsavailable
available for
forsale
sale
300,000
manufacturing
Less
-Lessending
endinginventory
inventory
overhead is
Variable
cost
of
goods
sold
300,000
Variable cost of goods sold
300,000
expensed.
Variable
Variable selling
selling&&administrative
administrative
expenses
90,000
390,000
expenses(30,000
(30,000 $3)
$3)
90,000
390,000
Contribution
510,000
Contributionmargin
margin
510,000
Less
Lessfixed
fixedexpenses:
expenses:
Manufacturing
$$150,000
Manufacturingoverhead
overhead
150,000
Selling
250,000
Selling&&administrative
administrative expenses
expenses 100,000
100,000
250,000
Net
$$260,000
Netoperating
operatingincome
income
260,000
Slide 18
Slide 19
Slide 20
Slide 21
Learning Objective 4
Understand the
advantages and
disadvantages of both
variable and absorption
costing.
Slide 22
Slide 23
Slide 24
In
In many
many countries,
countries,
including
including US,
US,
absorption
absorption costing
costing must
must be
be
used
used when
when filling
filling out
out
income
income tax
tax returns.
returns.
Since
Since top
top executives
executives
are
are typically
typically evaluated
evaluated based
based on
on
earnings
earnings reported
reported to
to shareholders
shareholders
in
in external
external reports,
reports, they
they may
may feel
feel that
that
decisions
decisions should
should be
be based
based on
on
absorption
absorption costing
costing data.
data.
McGraw-Hill Education (Asia)
Slide 25
Advantages
Impact of fixed
costs on profits
emphasized.
McGraw-Hill Education (Asia)
Consistent with
CVP analysis.
Net operating income
is closer to
net cash flow.
Consistent with standard
costs and flexible budgeting.
Easier to estimate profitability
of products and segments.
Profit is not affected by
changes in inventories.
Garrison, Noreen, Brewer, Cheng & Yuen
Slide 26
Fixed manufacturing
costs are capacity costs
and will be incurred
even if nothing is
produced.
Variable
Costing
McGraw-Hill Education (Asia)
Slide 27
Slide 28
Slide 29
Learning Objective 5
Compute predetermined
overhead rates and explain
why estimated overhead
costs (rather than actual
overhead costs) being used
in the costing process.
Slide 30
Slide 31
Slide 32
Slide 33
Estimate
Estimate the
the level
level of
of
production
production for
for the
the
period.
period.
Estimate
Estimate total
total amount
amount
of
of the
the allocation
allocation base
base
for
for the
the period.
period.
Estimate
Estimate total
total
manufacturing
manufacturing
overhead
overhead costs.
costs.
POHR =
McGraw-Hill Education (Asia)
Slide 34
Slide 35
$150,000
POHR =
50,000 direct labor hours (DLH)
Slide 36
Learning Objective 6
Slide 37
Slide 38
Slide 39
An Example
Slide 40
An Example
Equipment is leased for $100,000 per year.
Running at full capacity, 50,000 units may be
produced. The company estimates that 40,000 units
will be produced and sold next year.
Traditional
=
Method
$100,000
40,000
Capacity
Method
$100,000
50,000
Slide 41
Quick Check
Barossa
Barossa Winery
Winery in
in Barossa
Barossa Valley,
Valley,South
South
Australia,
Australia, leases
leases an
an automatic
automatic corking
corking machine
machine
for
for $100,000
$100,000 per
per year.
year.At
At full
full capacity,
capacity,itit can
can cork
cork
50,000
50,000 cases
cases of
of wine
wine per
per year.
year.The
The company
company
estimates
estimates 40,000
40,000 cases
cases of
of wine
wine will
will be
be produced
produced
and
and sold
sold next
next year.
year.What
What is
is the
the predetermined
predetermined
overhead
overhead rate
rate based
based on
on the
the estimated
estimated number
number of
of
cases
cases of
of wine?
wine?
a.
a.$2.00
$2.00per
percase.
case.
b.
b.$2.50
$2.50per
percase.
case.
c.
c.$4.00
$4.00per
percase.
case.
McGraw-Hill Education (Asia)
Slide 42
Quick Check
Barossa
Barossa Winery
Winery in
in Barossa
Barossa Valley,
Valley, South
South
Australia,
Australia, leases
leases an
an automatic
automatic corking
corking
machine
machine for
for $100,000
$100,000 per
per year.
year. At
At full
full
capacity,
capacity, it
it can
can cork
cork 50,000
50,000 cases
cases of
of
wine
wine per
per year.
year. The
The company
company estimates
estimates
40,000
40,000 cases
cases of
of wine
wine will
will be
be produced
produced
and
and sold
sold next
next year.
year. What
What is
is the
the
predetermined
predetermined overhead
overhead rate
rate based
based on
on
the
the estimated
estimated number
number of
of cases
cases of
of wine?
wine?
a.
a. $2.00
$2.00 per
per case.
case.
b.
b. $2.50
$2.50 per
per case.
case.
c.
c. $4.00
$4.00 per
per case.
case.
Slide 43
Quick Check
Barossa Winery in Barossa Valley, South
Australia, leases an automatic corking machine
for $100,000 per year. At full capacity, it can cork
50,000 cases of wine per year. The company
estimates 40,000 cases of wine will be produced
and sold next year. What is the predetermined
overhead rate based on the number of cases of
wine at capacity?
a. $2.00 per case.
b. $2.50 per case.
c. $4.00 per case.
Slide 44
Quick Check
Barossa Winery in Barossa Valley, South
Australia, leases an automatic corking
machine for $100,000 per year. At full
capacity, it can cork 50,000 cases of
wine per year. The company estimates
40,000 cases of wine will be produced
and sold next year. What is the
predetermined overhead rate based on
the number of cases of wine at capacity?
a. $2.00 per case.
b. $2.50 per case.
c. $4.00 per case.
McGraw-Hill Education (Asia)
Slide 45
Quick Check
When
When capacity
capacity is
is used
used in
in the
the denominator
denominator of
of the
the
predetermined
predetermined rate,
rate, what
what happens
happens to
to the
the
predetermined
predetermined overhead
overhead rate
rate as
as estimated
estimated activity
activity
decreases?
decreases?
a.
a.The
Thepredetermined
predeterminedoverhead
overheadrate
rategoes
goesup
upwhen
whenactivity
activity
goes
goesdown.
down.
b.
b.The
Thepredetermined
predeterminedoverhead
overheadrate
ratestays
staysthe
thesame
samebecause
because
ititis
isnot
notaffected
affectedby
bychanges
changesin
inactivity.
activity.
c.
c.The
Thepredetermined
predeterminedoverhead
overheadrate
rategoes
goesdown
downwhen
when
activity
activitygoes
goesdown.
down.
Slide 46
Quick Check
When
When capacity
capacity is
is used
used in
in the
the denominator
denominator of
of
the
the predetermined
predetermined rate,
rate, what
what happens
happens to
to
the
the predetermined
predetermined overhead
overhead rate
rate as
as
estimated
estimated activity
activity decreases?
decreases?
a.
a. The
The predetermined
predetermined overhead
overhead rate
rate goes
goes up
up when
when
activity
activity goes
goes down.
down.
b.
b. The
The predetermined
predetermined overhead
overhead rate
rate stays
stays the
the
same
same because
because it
it is
is not
not affected
affected by
by changes
changes in
in
activity.
activity.
c.
c. The
The predetermined
predetermined overhead
overhead rate
rate goes
goes down
down
when
when activity
activity goes
goes down.
down.
Slide 47
Quick Check
When estimated activity is used in the
denominator of the predetermined rate, what
happens to the predetermined overhead rate as
estimated activity decreases?
a. The predetermined overhead rate goes up when
activity goes down.
b. The predetermined overhead rate stays the same
because it is not affected by changes in activity.
c. The predetermined overhead rate goes down when
activity goes down.
Slide 48
Quick Check
When estimated activity is used in the
denominator of the predetermined rate,
what happens to the predetermined
overhead rate as estimated activity
decreases?
a. The predetermined overhead rate goes up
when activity goes down.
b. The predetermined overhead rate stays the
same because it is not affected by changes
in activity.
c. The predetermined overhead rate goes
down when activity goes down.
Slide 49
Slide 50
Slide 51
Learning Objective 7
Compute underapplied or
overapplied overhead cost and
prepare the journal entry to
close the balance in
Manufacturing Overhead to the
appropriate accounts.
Slide 52
Slide 53
Slide 54
Slide 55
Quick Check
Tiger,
Tiger,Ltd.
Ltd. had
had actual
actual manufacturing
manufacturing overhead
overhead
costs
costs of
of $1,210,000
$1,210,000 and
and aa predetermined
predetermined
overhead
overhead rate
rate of
of $4.00
$4.00 per
per machine
machine hour.
hour. Tiger,
Tiger,
Ltd.
Ltd. worked
worked 290,000
290,000 machine
machine hours
hours during
during the
the
period.
period. Tigers
Tigersmanufacturing
manufacturing overhead
overhead is
is
a.
a.
b.
b.
$50,000
$50,000 overapplied.
overapplied.
$50,000
$50,000 underapplied.
underapplied.
c.
c.
d.
d.
$60,000
$60,000 overapplied.
overapplied.
$60,000
$60,000 underapplied.
underapplied.
Slide 56
Quick Check
Tiger,
Tiger,Ltd.
Ltd. had
had actual
actual manufacturing
manufacturing overhead
overhead
costs
aa predetermined
costs of
of $1,210,000
$1,210,000 and
and
predetermined
Overhead
Applied
Overhead
Applied
overhead
machine
Tiger,
$4.00
per
290,000
hours
$4.00
per hour
hourhour.
290,000
hours
overhead rate
rate of
of $4.00
$4.00 per
per
machine
hour.
Tiger,
== $1,160,000
$1,160,000
Ltd.
hours
Ltd. worked
worked 290,000
290,000 machine
machine
hours during
during the
the
Underapplied
Overhead
period.
overhead
Underapplied
Overheadis
period. Tigers
Tigersmanufacturing
manufacturing
overhead
is
$1,210,000
$1,210,000 -- $1,160,000
$1,160,000
== $50,000
$50,000
a.
a.
b.
b.
$50,000
$50,000 overapplied.
overapplied.
$50,000
$50,000 underapplied.
underapplied.
c.
c.
d.
d.
$60,000
$60,000 overapplied.
overapplied.
$60,000
$60,000 underapplied.
underapplied.
Slide 57
$30,000
may be allocated
to these accounts.
$30,000 may be
closed directly to
cost of goods sold.
OR
Work in
Process
Finished
Goods
Cost of
Goods Sold
McGraw-Hill Education (Asia)
Cost of
Goods Sold
Garrison, Noreen, Brewer, Cheng & Yuen
Slide 58
Disposition of
Under/Overapplied Overhead
Harvey Fresh s
Mfg. Overhead
Actual
Overhead
overhead
applied
costs
to products
$30,000
Adjusted
Balance
$120,000
$30,000
$150,000
$30,000
overapplied
Slide 59
Slide 60
Slide 61
20%
20% $30,000
$30,000
Slide 62
Slide 63
Slide 64
Quick Check
Revisit
Revisitthe
theearlier
earlierTiger,
Tiger,Ltd.
Ltd.exercise
exerciseon
onslide
slide56.
56. Before
Beforeany
any
manufacturing
manufacturingfixed
fixedoverhead
overheadover/underapplied
over/underappliedadjustment,
adjustment,
the
therelevant
relevantfigures
figuresare
areas
asfollows:
follows:
Work
20,000
Workin
inprocess
process
20,000
Finished
Finishedgoods
goods30,000
30,000
Cost
Costof
ofgoods
goodssold
sold
50,000
50,000
How
How much
muchshould
shouldTigers
Tigersover/underapplied
over/underappliedmanufacturing
manufacturing
fixed
fixedoverhead
overheadbe
beadjusted
adjustedto
to Finished
FinishedGoods
Goods(FG)
(FG) ififthe
the
proportional
proportionalallocation
allocationmethod
methodis
isused?
used?
a.
a.
b.
b.
$15,000
$15,000 more
more (i.e.
(i.e. debit)
debit) to
to FG.
FG.
$15,000
$15,000 less
less (i.e.
(i.e. credit)
credit) to
to FG.
FG.
c.
c.
d.
d.
$30,000
$30,000 more
more (i.e.
(i.e. debit)
debit) to
to FG.
FG.
$30,000
$30,000 less
less (i.e.
(i.e. credit)
credit) to
to FG.
FG.
Slide 65
Quick Check
Revisit
Revisitthe
theearlier
earlierTiger,
Tiger,Ltd.
Ltd.exercise
exerciseon
onslide
slide56.
56. Before
Beforeany
any
manufacturing
manufacturingfixed
fixedoverhead
overheadover/underapplied
over/underappliedadjustment,
adjustment,
the
therelevant
relevantfigures
figuresare
areas
asfollows:
follows:
Work
20,000
Workin
inprocess
process
20,000
Finished
Finishedgoods
goods30,000
30,000
Cost
Costof
ofgoods
goodssold
sold
50,000
50,000
How
How much
muchshouldTigers
shouldTigersover/underapplied
over/underappliedmanufacturing
manufacturing
fixed
fixedoverhead
overheadbe
beadjusted
adjustedto
to Finished
FinishedGoods
Goods(FG)
(FG)ififthe
the
proportional
proportionalallocation
allocationmethod
methodis
isused?
used?
a.
a.
b.
b.
$15,000
$15,000 more
more (i.e.
(i.e. debit)
debit) to
to FG.
FG.
$15,000
$15,000 less
less (i.e.
(i.e. credit)
credit) to
to FG.
FG.
c.
c.
d.
d.
$30,000
$30,000 more
more (i.e.
(i.e. debit)
debit) to
to FG.
FG.
$30,000
$30,000 less
less (i.e.
(i.e. credit)
credit) to
to FG.
FG.
Slide 66
Quick Check
Revisit
Revisitthe
theearlier
earlierTiger,
Tiger,Ltd.
Ltd.exercise
exerciseon
onslide
slide55.
55. Before
Beforeany
any
manufacturing
manufacturingfixed
fixedoverhead
overheadover/underapplied
over/underappliedadjustment,
adjustment,
the
therelevant
relevantfigures
figuresare
areas
asfollows:
follows:
Work
$20,000
Workin
inprocess
process
$20,000
Finished
Finishedgoods
goods$30,000
$30,000
Cost
Costof
ofgoods
goodssold
sold
$50,000
$50,000
How
How much
muchshouldTigers
shouldTigersover/underapplied
over/underappliedmanufacturing
manufacturing
fixed
fixedoverhead
overheadbe
beadjusted
adjustedto
to Cost
Costof
ofGoods
GoodsSold
Sold(COGS)
(COGS) ifif
the
theproportional
proportionalallocation
allocationmethod
methodis
isused?
used?
a.
a.
b.
b.
$50,000
$50,000 more
more (i.e.
(i.e. debit)
debit) to
to COGS.
COGS.
$50,000
$50,000 less
less (i.e.
(i.e. credit)
credit) to
to COGS.
COGS.
c.
c.
d.
d.
$25,000
$25,000 more
more (i.e.
(i.e. debit)
debit) to
to COGS.
COGS.
$25,000
$25,000 less
less (i.e.
(i.e. credit)
credit) to
to COGS.
COGS.
Slide 67
Quick Check
Revisit
Revisitthe
theearlier
earlierTiger,
Tiger,Ltd.
Ltd.exercise
exerciseon
onslide
slide56.
56. Before
Beforeany
any
manufacturing
manufacturingfixed
fixedoverhead
overheadover/underapplied
over/underappliedadjustment,
adjustment,
the
therelevant
relevantfigures
figuresare
areas
asfollows:
follows:
Work
20,000
Workin
inprocess
process
20,000
Finished
Finishedgoods
goods30,000
30,000
Cost
Costof
ofgoods
goodssold
sold
50,000
50,000
How
How much
muchshouldTigers
shouldTigersover/underapplied
over/underappliedmanufacturing
manufacturing
fixed
fixedoverhead
overheadbe
beadjusted
adjustedto
to Cost
Costof
ofGoods
GoodsSold
Sold(COGS)
(COGS) ifif
the
theproportional
proportionalallocation
allocationmethod
methodis
isused?
used?
a.
a.
b.
b.
$50,000
$50,000 more
more (i.e.
(i.e. debit)
debit) to
to COGS.
COGS.
$50,000
$50,000 less
less (i.e.
(i.e. credit)
credit) to
to COGS.
COGS.
c.
c.
d.
d.
$25,000
$25,000 more
more (i.e.
(i.e. debit)
debit) to
to COGS.
COGS.
$25,000
$25,000 less
less (i.e.
(i.e. credit)
credit) to
to COGS.
COGS.
Slide 68
Learning Objective 8
Slide 69
Slide 70
Slide 71
Slide 72
Slide 73
Profits remain the same despite of changing quantity in production and ending inventory
Use of Variable Costing can avoid Profit inflation through producing more inventories
McGraw-Hill Education (Asia)
Slide 74
More
More accurate
accurate but
but more
more complex
complex to
to compute.
compute.
McGraw-Hill Education (Asia)
Slide 75
Quick Check
What
What effect
effect will
will the
the overapplied
overapplied overhead
overhead have
have
on
on Harveys
Harveysnet
net operating
operating income?
income?
a.
a. Net
Net operating
operating income
income will
will increase.
increase.
b.
b. Net
Net operating
operating income
income will
will be
be unaffected.
unaffected.
c.
c. Net
Net operating
operating income
income will
will decrease.
decrease.
Slide 76
Quick Check
What
What effect
effect will
will the
the overapplied
overapplied overhead
overhead have
have
on
on Harveys
Harveysnet
net operating
operating income?
income?
a.
a. Net
Net operating
operating income
income will
will increase.
increase.
b.
b. Net
Net operating
operating income
income will
will be
be unaffected.
unaffected.
c.
c. Net
Net operating
operating income
income will
will decrease.
decrease.
Slide 77
Slide 78
End of Chapter 5
Slide 79