Variable Cost Tools: As A Decision
Variable Cost Tools: As A Decision
Variable Cost Tools: As A Decision
Product cost:
Per unit production cost is called product cost. It can also define, cost are those costs that
directly with the purchase or manufacture.
Period cost:
Period costs are those cost that are directly taken to the income statement as expense.
Product cost.
Product cost
Product cost
1 . Absorption costing is the costing method 1. Variable costing is the costing method
that includes both variable that includes only variable manufacturing
manufacturing and fixed manufacturing overhead - direct raw material, direct
overhead directly as the products costs. labor and variable factory overhead.
It includes direct new material , direct
labor and both variable and fixed
manufacturing overhead
2. Its another name is full cost. 2. It's another name is direct cost.
3. Ending inventory is higher. 3. Ending inventory is lower than the
absorption costing method.
4. Fixed manufacturing cost is treated as 4. Fixed manufacturing cost is treated
product cost. as period.
Example 1:
No. of units product Direct material per unit Direct 6,000 units
labor per unit Direct cost overhead per unit $2 $4 $1
Variable selling and administrative
Expense per unit $3
Fixed cost per unit $30,000
Requirement:
Compute per unit product cost under
a) Absorption costing method
b) Variable costing method
Solution:
Example 2:
Find-
Fixed cost:
Fixed overhead $300,000
Fixed selling and administrative cost $450,000
Requirement:
(1) Compute per unit product cost
under-
(a)Variable costing method
(b)Absorption costing method
(2) Prepare income statement under
(a)Variable costing method
(b)Absorption costing method
(3) Show the effect on profit for using both methods in year -1 and year-2.
Solution:
A B
Absorption costing method Variable costing method
Description
Revenue:
Description $ $
Revenue: 133330
Sale (200*8000) Less: cost
1199970
of goods sold:
1,600,000
(76640)
(610,000)
3) Cost inventory under variable Cost
method = (100*2000) =TK.200, 000
Closing inventory under absorption Costing
method =TK.(133.33*2000) =TK.266, 660
If V.C method is used current year profit will be lower and next year profit will be high and
if A.C method is used the effect on profit will be just inverse.
Job Order Costins
A cost system used in situation where many different products are produced
during a period.
Period costing:
A costing system used in those manufacturing situations where a single
homogenous product is product for long period of time.
Cost driver:
A factor that causes overhead cost.
For example
Direct labors hours
Machine hours
Compute time etc.
Over applied:
A credit balance of the manufacturing overhead account that occur. When the
amount of overhead cost applied to work in process in greater than the amount of
overhead cost actually incurred during a period.
Under applied:
A debit balance of the manufacturing overhead account that occurs when the
amount of overhead cost applied to work in process in lower than the amount of overhead
cost actually incurred during a period.
head applied job = FOR* Amount of allocation base incurred during a period.
cise (3-3)
t labor - hours
ine - hours
"material cost
facturing overhead
Company
Company
A B c cost driver
60000 30000 40000
termine overhead rates are computed by using the following cost drives-
C Raw material
Required -
(a) Compute predetermines overhead rates for A, B, C companies.
(b) Company produce product in caring 7000 direct labor. What is the overhead cost for
company A. What would the condition of overhead applied or under applied if the
actual overhead cost =$430000?
Solution:
a) For company A
For company B
Activity:
An event that caused the consumption of overhead resources in an organization.
Opportunity cost:
Opportunity cost is the cost of forgoing the nest best alternative.
Example:
Relevant cost:
Relevant cost is the costing system that differs among the courses of action and
expected future cost.
'"',
j
Determine:
(a) Break Even Sales
(b) Total Sales
(c) Margin of safety.
(d) Total contribution Margin