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Unit 2 - Coggle Diagram
Unit 2
Lesson 4
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Production equals sales:
There is no change in inventories meaning no change in fixed overhead costs. Therefore both costing methods all of the current fixed manufacturing overhead will flow through to the statement of profit/loss and be changed against profit
Sales exceed production( decrease in inventories)
Since only the current fixed manufacturing costs are expensed under variable costing the operating profit reported under absorption costing will be less than the operating profit reported under variable costing
Production exceeds sales( Inventories increase)
Since all current fixed manufacturing overhead costs are expensed under variable costing, the operating profit reported under absorption costing will be greater than the operating profit reported under variable costing
Long term differences in profit:
Over an extended period of time the cumulative figures reported under absorption costing and variable costing will be about the same, they will differ only by the amount of fixed manufacturing overhead cost in ending inventories under absorption costing.
Changes in production volume
Variable costing operating profit is not affected by changes in production volume. For any given level of sales, operating profit under absorption costing will increase as the level of output increases & Hence inventories increase
Lesson 1
Variable cost basis statement
- Used for internal reporting purposes of decision making
- Don't take fixed cost into account
- Cost per unit= Variable manufacturing cost
- Any unsold inventory will remain as inventory and are not expected
- When all factors remain unchanged, both sales & profit will increase
Absorption cost basis statement
- used for external reporting
- Takes fixed manufacturing overheads into account
- Avoids the possibility of fictitious losses being repeated
- Fixed manufacturing overheads are essential to production & should be incorporated into product cost
- Profit= Function of sale & production
Absorption costing;
- Product cost
-Direct materials
-Direct labour
-Variable mfg overhead
-Fixed mfg overhead
- Period cost
-Selling & admin expenses
Variable costing:
- Product cost
-Direct labour
-Direct materials
-Variable mfg overhead
- Period costs
-Fixed mfg overhead
-Selling & admin expenses
Lesson 2
Absorption costing includes all production costs variable & fixed. Absorption costing is that the higher level of activity, the higher the cost the activity will be. This is summarised using the Overhead absorption rate.
Overhead absorption rate= Manufacturing overhead/Activity level
The cost unit is calculated using the budgeted figures and is therefore known as the predetermined overhead rate.
Predetermined overhead absorption= Budgeted manufacturing overhead/ Budgeted activity level
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Lesson 3
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P&L Absorption cost:
Sales
Less:Cost of goods sold:
beginning inventory
Add: COGM
Goods available for sale
Ending inventory
Gross Margin
Less: Selling & admin exp
Variable
Fixed
Operating Profit
P & L Variable costing:
Sales
Less:Variable expenses
Beginning inventory
Add:COGM
Goods available for sale
Ending Inventory
Variable cost of goods sold
Variable selling & Admin expenses
Contribution margin
Less fixed expenses
Manufacturing overhead
selling and admin expenses
Operating profit