variable & absorption costing
TRANSCRIPT
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8/6/2019 Variable & Absorption Costing
1/23
R.S.Rengasamy, Dept. of Textile Technology
variable & Absorption costing
Variable & Absorptioncosting
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8/6/2019 Variable & Absorption Costing
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R.S.Rengasamy, Dept. of Textile Technology
Variable & Absorption costing
Variable & Absorption costing- Not job , Batch , Process costing systemVariable Costing : (VC)Used for = Internal reporting for decision making
w.r.ta) Price fixing on special ordersb) Optional sales mixc) Adding new product lined) Dropping new product linee) Developing production plans if certain input are in short
supplyf) Buy or make decisiong) Selling in a limited marketh) Sales mix with constraintsi) Sales mix with no constraints
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8/6/2019 Variable & Absorption Costing
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R.S.Rengasamy, Dept. of Textile Technology
Variable & Absorption costing
Absorption Costing : (AC)
(Full costing , Traditional costing , Conventionalcosting)
Used for = Income statement for externalreporting / IT purposesVC & AC are not mutually exclusivecomplementary in nature
Variable Costing :-Recognises only variable costs as production andselling costs
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8/6/2019 Variable & Absorption Costing
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R.S.Rengasamy, Dept. of Textile Technology
Variable & Absorption costing
Fixed manufacturing Over Head are excludedfrom product cost , not inventoriable , period costsand matches against the revenue for the period.
Absorption Costing:-Absorbs all cost necessary to product and have itin a saleable form.
Manufacturing Over Head are inventoriable ,
product costs matches against the revenue for theyear in which sales are made
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8/6/2019 Variable & Absorption Costing
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R.S.Rengasamy, Dept. of Textile Technology
Variable & Absorption costing
Per year
Normal production (Kg) 4000
Actual Production (Kg) 4800
Over Head at normal production Rs 16000
Other expenses Rs 1000
SFR (Standard Fix Over Headrate)
Rs 4/ Unit
Variable cost Rs 6/ Unit
Sales volume Nil
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8/6/2019 Variable & Absorption Costing
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R.S.Rengasamy, Dept. of Textile Technology
Variable & Absorption costing
Income statement (Absorption Costing)Particulars Amount (Rs)
A) Sales RevenueLess : Total cost of manufacturing
Variable costs (64800) = 28800Fix Over Head (44800) = 19200
Total = 48000
00
B) Cost of goods manufacturedPlus : Operational Inventory = 0000Less : Cost of closing Inventory
(480010) =
48000
C) Cost of goods manufacturing & sold = Nil
D) Gross margin (A-C) (Unadjusted) Nil
E) Capacity variance (Favourable)(over absd) *8004
( Fixed costs inventoriable)
3200
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R.S.Rengasamy, Dept. of Textile Technology
Variable & Absorption costing
Income statement (Absorption cost) continued ..
F) Gross margin (adjusted) (D+E) 3200
G) Less other expenses 1000
H) Net income before taxes 2200
* Matched against revenue of the year in which sales are made
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8/6/2019 Variable & Absorption Costing
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R.S.Rengasamy, Dept. of Textile Technology
Variable & Absorption costing
Income statement (Variable costing)
Particulars Amount (Rs)
A) Sales revenue Nil
B) Variable production cost 48006 = 28800
+ opening inventory (variable cost) = Nil- closing inventory (variable cost) 48006 = 28800
C) Cost of goods manufactured & sold = Nil
D) Contribution (A-C) (Manufacturing) Nil
E) Less : Fixed costsFixed Over Head = *16000
Others = 1000Total = 17000* Non-inventoriable* At normal level
F) Net income before taxes 17000
* Matched against the revenue of that year
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8/6/2019 Variable & Absorption Costing
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R.S.Rengasamy, Dept. of Textile Technology
Variable & Absorption costing
Data
P = S P>S P
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8/6/2019 Variable & Absorption Costing
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R.S.Rengasamy, Dept. of Textile Technology
Variable & Absorption costing
Income statement ( Year 1)P= S
Particulars Absorption cost Variable cost
Sales (1000012) 120000 120000
Less cost of goods
manufactured
Variable cost (100006) 60000 60000
Fixed cost (100004) 40000
Cost of goodsmanufactured & sold
100000 60000
Gross margin 20000
Contribution 60000
Less : Fixed cost 40000
Net income before taxes 20000 20000
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8/6/2019 Variable & Absorption Costing
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R.S.Rengasamy, Dept. of Textile Technology
Variable & Absorption costing
Income statement (Year 2) , P>SParticulars Absorption cost Variable cost
A) Sales (500012) 60000 60000
Less : cost of goods manufactured
(a) Variable cost (100006) 60000 60000
(b) Fixed cost ( 100004) 40000B) Cost of goods manufactured (a+b) 100000 60000
(i) Less : Cost of C.I
500010 50000
500006 30000
C) Cost of goods manufactured & sold 50000 (a+b-i) 30000D) G.M (A-C) 10000
Contribution 30000
Less Fixed cost 40000
Net income 10000 10000
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8/6/2019 Variable & Absorption Costing
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R.S.Rengasamy, Dept. of Textile Technology
Variable & Absorption costing
Income statement (Year 3) ,P
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8/6/2019 Variable & Absorption Costing
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R.S.Rengasamy, Dept. of Textile Technology
Variable & Absorption costing
Information for year 1 and 2Year 1 Year 2
Production (units) 170000 140000
Sales (units) 140000 160000
Standard variable production cost = Rs 6/UnitSale Price = Rs 10/UnitFixed production Over Head
at normal capacity 150000 unit = 300000 Rs
So, SFR = Rs 2.00Selling & Administrative expenses:-
Fixed Rs 130000 Variable 5% of sales
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8/6/2019 Variable & Absorption Costing
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R.S.Rengasamy, Dept. of Textile Technology
Variable & Absorption costing
Absorption costingParticulars Year 1 Year 2
Sales revenue 1400000 1600000
Cost of manufacturing 1360000 (81.7 Lakh) 1120000(81.4 Lakh)
+ cost of O.I 240000(80.3 Lakh)
- Cost of C.I 240000(30000
8) 80000(8
0.1 Lakh)Cost of goods manufactured&sold
1120000 1280000
G.M (Unadjusted) 280000 320000
Capacity variance 40000(200002) 20000(100002)
G.M (Adjusted) 320000 300000
Less Non production costs 200000(5% of 14 Lakh+1.3 Lakh)
210000(5% of 16 Lakh+1.3 Lakh)
Net income before taxes 120000 90000
Less income tax (35%) 42000 31500
Net income after tax 78000 58500
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8/6/2019 Variable & Absorption Costing
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R.S.Rengasamy, Dept. of Textile Technology
Variable & Absorption costing
Variable costingParticulars Year 1 Year 2
Sales revenue 1400000 1600000
Cost of manufacturing 1020000 840000
+ cost of O.I 180000
- Cost of C.I 180000 60000
Cost of goods manufactured & sold 840000 960000
Contribution (manufacturing) 560000 640000
Less V. non production cost 70000 80000
Contribution (final) 490000 560000
Less Fixed costFixed Over HeadFixed selling etc.
300000130000
300000130000
Net income before tax 60000 130000
I-Tax 21000 45500
Net income after tax 39000 84500
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8/6/2019 Variable & Absorption Costing
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R.S.Rengasamy, Dept. of Textile Technology
Variable & Absorption costing
Reconcilation statementParticulars Year 1 Year 2 Combined
Net income before tax
Absorption cost 120000 90000 210000
Variable cost 60000 130000 190000
Difference 60000 40000 20000
Changes in inventory
O.I 30000
C.I 30000 10000 10000
(A) 30000 20000 10000
Increase / Decrease in net income
(SFRA),(SFR = Rs 2) 60000 40000 20000
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8/6/2019 Variable & Absorption Costing
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R.S.Rengasamy, Dept. of Textile Technology
Variable & Absorption costing
Reconcilation statement(VC)Particulars Amount (Rs)
Increased in sales revenue in year 2 (20000Rs 10) 200000
LessIncreased manufactured V.C (20000Rs 6) 120000
Increased contribution 80000
LessIncreased selling & Administrative expense (5% of
sales)
10000
Increased contribution (final) 70000
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8/6/2019 Variable & Absorption Costing
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R.S.Rengasamy, Dept. of Textile Technology
Variable & Absorption costing
Decision making using variable costing
Special order & special price
You are operating at lower than normal capacitySome one gives extra order which boost your sales capacity
But his offer in selling price is below normal price and contributionfrom this new offer is positive.
Will you accept the order?
Your normal capacity is 15000 units
Your current capacity is 12000 units (beyond which you dont havelocal market)
Your variable cost per unit is Rs.20 and selling price (Local) is Rs.30Fixed Overhead at normal capacity = Rs 45000
Your SFOR is Rs 4500/15000 = Rs 3Extra order is 3000 units at SP/unit = Rs 22
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8/6/2019 Variable & Absorption Costing
19/23
R.S.Rengasamy, Dept. of Textile Technology
Variable & Absorption costing
Using Variable costing
Additional sales revenue is (300022) =
66000Less variable cost (300020) =
60000 Additional contribution is = 600
Without this special order
SR (1200030) =
360000VC (1200020) =
240000Contribution = 120000
Using Absorption costingSales revenue (300022) =
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8/6/2019 Variable & Absorption Costing
20/23
R.S.Rengasamy, Dept. of Textile Technology
Variable & Absorption costing
Make or buy a componentAnnual requirement of a component = 20000If the component is manufactured in-house(Company has spare capacity and no additionalinvestment is required the cost structure per unitisDirect material = Rs 50Direct labour = Rs 20 Variable OH = Rs 12
Fixed FOH allocated = Rs 5Total = Rs 87If you are outsource it the cost structure isPrice = Rs 80Ordering = Rs 3
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8/6/2019 Variable & Absorption Costing
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R.S.Rengasamy, Dept. of Textile Technology
Variable & Absorption costing
Particular Make Buy
Direct material (5020000) 1000000
Direct labour (2020000) 400000
Variable OH (1220000) 240000
Purchase price (8020000) 1600000
Ordering/inspection cost(320000) 60000
Total cost 1640000 1660000
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8/6/2019 Variable & Absorption Costing
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R.S.Rengasamy, Dept. of Textile Technology
Variable & Absorption costing
Optimal sales mix (No demand constraints)Particulars Product
X Y Z
Selling price / unit 108 81 72
Less variable cost / unit 60 45 40Contribution margin /unit 48 36 32
Time to produce /unit , hrs.(including stoppage time)
24 12 8
CM/hour 2 3 4
If there is no manufacturing constraints (materials, labour, machine, technical competency, layout)
What the firm do ?
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8/6/2019 Variable & Absorption Costing
23/23
R.S.Rengasamy, Dept. of Textile Technology
Variable & Absorption costing
Demand constraintsOperating capacity of company is 300 days/Year
X Y Z
Demand /annum 300 1200 1500
Total hours available = 300243 (3 lines) = 21600
All three lines can produce any of X, Y, Z
For Z of 1500 unit requires 15008 = 12000 hrs.
Remaining hrs. available (21600-12000) = 9600
Units of Y that can be produced = 9600/12=800
One line exclusively allotted to Z 7200 hrs. = 900 units
2nd line 2/3rd of time (4800 hrs.) allotted to Z = 600 units
2nd line 1/3rd of time (2400 hrs.) allotted to Y = 200 units
3rd line fully allotted to Y 7200 hrs.(30024 hrs.) = 600 units