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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 2
ACCOUNTING FOR PERIOD & PRODUCT COSTS (I)
Product costs
When product is sold: Costs are transferred to cost of goods sold account.
SLIDE 19/47
Initially treated as inventory and do not appear on
income statement
2. OPERATING PROFIT UNDER ABSORPTION COSTING AND VARIABLE COSTING
SLIDES 21-25
Operating profit: absorption costing
: calculation of operating profit under absorption costing
Operating profit: variable costing:
calculation of operating profit under variable costing
3. DIFFERENCES IN PROFIT UNDER ABSORPTION COSTING AND VARIABLE COSTING
SLIDES 27-34
Stock valuation consequences:
classic calculation of operating profit under absorption costing
Stock valuation consequences:
classic calculation of operating profit under variable costing
Stock valuation consequences
Basic differences AC and VC
Production > sales: profit AC > profit VC
Sales > production: profit AC < profit VC
production = sales: profit AC = profit VC
4. ABSORPTION COSTING AND ITS INFLUENCE ON PERFORMANCE EVALUATION DECISIONS
Stock build-up (I)
Absorption costing enables a manager to increase operating profit in a specific period by increasing the production schedule, even if there is no customer demand for the additional production.
SLIDE 36/47
Stock build-up (II)
A lower expense for cost of goods sold will result in a higher operating income.
Therefore, when production > sales, less of the fixed production costs is expensed as cost of goods sold in the current year.
Stock build (III)
: undesirable effects of producing for stock
2. Deterioration and obsolescence
Inability to sell some of the inventory in time before it goes bad
Products can become obsolete
3. A plant manager may defer maintenance
Increased repairs
and less efficient equipment may decrease future profit
1. Storage costs
Labour costs: Workers need to categorize and organize
items and transport items from one place to another
Insurance costs increase with high levels of inventory