Managerial Accounting
4A170025 卓佳穎 4A170026 李佳容
4A1A0082 潘惠靜 4A1A0025 蔡季芳
Group 5
Accounting Principles
Direct labor
Variable Overhead
Direct material
Operating expenses-Fixed
Operating expenses-Variable
Fixed Overhead
Absorption Costing Variable Costing
Product Cost
Period cost
Product Cost
Period cost
Accounting Principles
Absorption Costing
- Maybe there will lead to a risk that in order to get dividends and bonuses, production of high profits in the report , but the actual cost of production were postponed to the following year.
Variable Costing
- Operating profit with sales volume increase or decrease lift. But it does not meet the traditional concept of cost.
- The American Institute of CPAs and CASB are expressly provided by the full-cost method carried out inventory valuation
CASE STUDY
abstract
The new president of Graham, Inc., Tom Graham, Jr. was very pleased with the turnaround in sales in August.
August sales were $200,000 greater than in July, so he had every reason to expect the income statement to show a healthy increase over July’s profit of $ 14,036.
When the August report came in showing a loss of $22,928, he was shocked.
Graham , Inc.
abstract
Graham , Inc.
abstract
Graham called the controller, Andy Derrow, for an explanation. Derrow assured him that the figures were correct. The reason for the loss was that the company had reduced production levels well below normal.
This resulted in an unabsorbed production volume variance which more than offset the impact of the increase in sales.
Graham , Inc.
abstract
Graham , Inc.
Derrow reworked the August statement with other accounting principles and found that the loss turned into a profit.
Questions
1. Approximately how busy (relative to a normal month) was the factory in August?
Graham , Inc.
Answers
Graham , Inc.
• Overhead volume variance it refers to the variance between the cost of production caused by the different.
• And we see a unfavorable variance between the $ 107,480, representing a yield reduction caused by increased unit cost-sharing, which means that in August the plant is relatively busy.
Questions
2. Can you construct an income statement for a “normal” month
under both absorption costing and direct costing? Analyze the profit variance for August versus a normal month.
Graham , Inc.
Answers
Absorption costing
August July Variances
Sales $1,347,000 $1,132,112 $214,888
Standard Cost of Goods Sold $712,000 $610,416 $101,584
Gross Margin $635,000 $521,696 $113,304
Less Manufacturing Variances
Labor ($17,200) ($21,704) $4,504
Marerial $15,800 $20,324 ($4,524)
Overhead
Volume $107,480 ($1,788) $109,268
Spending $5,380 $8,692 ($3,312)
Factory Overhand -- --
Profit before Administrative and selling Expenses $523,540 $516,172 $7,368
Selling Costs $380,736 $341,928 $38,808
Administrative Costs $165,732 $160,208 $5,524
Profit ($22,928) $14,036 ($36,964)
Answers
Direct costing
August July Variances
Sales $1,347,000 $1,132,112 $214,888
Standard Cost of Goods Sold $492,000 $418,648 $73,352
Gross Margin $855,000 $713,464 $141,536
Less Manufacturing Variances
Labor ($17,200) ($21,704) $4,504
Marerial $15,800 $20,324 ($4,524)
Overhead
Volume
Spending $5,380 $8,692 ($3,312)
Factory Overhand $270,280 $263,448 $6,832
Profit before Administrative and selling Expenses $580,740 $442,704 $138,036
Selling Costs $380,736 $341,928 $38,808
Administrative Costs $165,732 $160,208 $5,524
Profit $34,272 ($59,432) $93,704
Answers
Absorption costing
• August production levels decreased Cost Variance analysis adjusted 60 times higher than normal, so even 19% more revenue can not improve the overall profit than usual, and even cause a loss.
Direct costing
• Like August revenue was significantly higher than normal month, revenue increased by about 19 percent, but after removing the impact of fixed manufacturing costs, the cost variance is less than revenue, increased by only about 10%, The rate of increase in revenue over of cost increases, so that in August variable costing profit will be significantly higher than normal month.
Answers
Graham , Inc.
conclusion • In August, the full cost method can be
seen on a production level worse than normal month, so the fixed overhead allocated to each number on the product is large, and therefore increase revenue will not help anything.
• On variable costing, focusing on the level of sales, although lower production levels in August, but Increased sales volume levels, so revenue growth up, of course, profits also followed growing.
Questions
3. Be prepared to explain the profit differences shown in Exhibits 1 and 2 ($-22,928 vs. $+34,272) and in Exheditibit 3 ($+14,036 vs. $-59,432).
Graham , Inc.
August -Table I & II Absorption costing Direct costing
Sales 1,347,000 1,347,000
Standard Cost of Goods Sold (712,000) (492,000)
Gross Margin 635,000 855,000
Less Manufacturing Variances
Labor (17,200) (17,200)
Marerial 15,800 15,800
Overhead
Volume 107,480
Spending 5,380 (111,460) 5,380 (3,980)
Overall Gross Margin 523,540 851,020
Selling Costs
Sales Expenses 338,056 338,056
Sales Taxes 13,900 13,900
Freight Allowed 28,780 (380,736) 28,780 (380,736)
Factory Overhand (270,280)
Administrative Costs
General and Administrative 108,060 108,060
Interest Expense 57,672 (165,732) 57,672 (165,732)
Profit (22,928) 34,272
Answers
Graham , Inc.
August profits variance (Table I&II) • Because of variable cost does not
include fixed manufacturing overhead, so significantly less than the absorption costing. And than Cost variance analysis expense adjustments, where the only variance is the method takes into account the absorption costing of fixed manufacturing overhead, so the cost variance analysis on adjustment will adjust the fixed manufacturing overhead, so cost becomes high.
Answers
Graham , Inc.
August profits variance (Table I&II) • Although variable costs need to be
deducted fixed manufacturing costs incurred during the period, but this fee includes only fixed manufacturing overhead occurred this month, also significantly less than the fixed manufacturing overhead under the full cost method required amortization.
• Therefore all of the absorption costing of profit will be reduced a lot.
July -Table III
Absorption costing Direct costing
Sales 1,132,112 1,132,112
Standard Cost of Goods Sold (610,416) (418,648)
Gross Margin 521,696 713,464
Less Manufacturing Variances
Labor (21,704) (21,704)
Marerial 20,324 20,324
Overhead
Volume (1,788)
Spending 8,692 (5,524) 8,692 (7,312)
Overall Gross Margin 516,172 706,152
Selling Costs (341,928) (341,928)
Factory Overhand (263,448)
Administrative Costs (160,208) (160,208)
Profit 14,036 (59,432)
Answers
Graham , Inc.
July profit variance (Table III) • The August profits variance of COGS variable
costing would certainly lower the absorption costing , because they do not contain fixed manufacturing overhead. And after expense adjustments cost variance analysis is a major variance in profit, because under variable costing fixed manufacturing costs will be recognized during the whole occurrence, reduce profits of Variable Costing. But absorption costing would be spread unsold inventory and let reduce a lot of costs , so profits are higher than variable costing.
Questions
4. Could the problem in the case ever arise with respect to annual income statements?
Graham , Inc.
The problem, of course will continue to be repeated ,unless the level of production and sales levels are equal, it will not be such a problem.
Answers
5.From a managerial perspective, how does Graham , Inc. earn a profit? Which costing system best reflects the basic economics of the business?
Questions
Graham , Inc.
Answers
Graham , Inc.
• In the whole, have a good revenue, but also need to have good cost control, when the level of production was reduced unit costs will increase, so the best way is to maintain a certain level of production, and increase revenue in order to generate profits for the company.
• Variable costing is the best method reflects the economic efficiency of enterprises.
Answers
Graham , Inc.
• Variable costing is the best method reflect the economic, as absorption costing can be reasonably assessed on all the costs to each product, rather than just focus on the impact of changes in variable cost.
Questions
6. What do you recommend?
Graham , Inc.
Recommendations in a short period with variable costing , cost more precise control , view operating performance . Long-term to the absorption costing mainly for the benefit of their overall planning. However, the provisions of GAAP use the absorption costing of preparation of the income statement ,but also because the main purpose of financial statements is to report overall business during the year.
References
•Book : Cases in Cost Management A Strategic Emphasis
by John K Shank
•PPT design : http://sc.chinaz.com/ppt/
•Video : https://www.youtube.com/watch?v=ApRSgmnnEjI