Int. Acc. MA LECT 2: Income effects of alternative stock-costing methods…
Int. Acc. MA LECT 2: Income effects of alternative stock-costing methods part 1
IMPORTANCE OF INCOME FIGURES
General rule to calculate
operating profit =
Total revenues - cost of goods sold – selling, general
and administrative expenses
Stock evaluation methods affect operating profit
Income figures/ profit figures are a key number in the performance evaluation of managers.
1. STOCK COSTING CHOICES: VARIABLE COSTING AND ABSORPTION COSTING
Fixed manufacturing costs are excluded from stock costs. Only includes costs directly related to the production.
Cost of goods sold = Variable manufacturing costs
Stock “absorbs” all manufacturing costs
Cost of goods sold = Variable manufacturing costs + fixed production costs
Variable costing and absorption costing methods
differ in the treatment of fixed manufacturing costs.
: Marketing & selling expenses, administrative expenses, office rent expenses etc.
Included within the selling, general & administrative expenses (SG&A) section of the income statement
: Charged to expense in the period
A business that has no production or inventory purchasing activities will incur no product costs, but will still incur period costs.
Are only incurred if products are acquired or produced
Included in the cost of goods sold section of the income statement
Are assigned to the product, because they are known
per product (cost tracing).
Product costs include manufacturing costs.
Period costs do not include manufacturing costs.
This distinction is relevant to Absorption Costing and Variable Costing.