This is an aesthetic summary of chapter 8 for FBS222 at the University of Pretoria. I used class notes, lecture slides, past papers and other notes to gather the information. This chapter appears in the sick test and the exam. I made this notes in 2023 but the module doesn't change much over the ye...
Many companies consist of separate business units called profit centres.
It’s NB for companies to determine both overall performance of the business + performance of
the individual profit centres.
o The overall income statement is useful for looking at overall company performance &
segmented income statement can be used for each profit centre.
Two methods of computing income have been developed based on:
o Variable costing
o Full or absorption costing.
Absorption Costing Variable Costing
Assigns only variable manufacturing costs to
Definition: Assigns all manufacturing costs to product
product
Product Cost: DM, DL, variable OH, and fixed OH DM, DL, and variable OH
Period Cost: Selling expenses, and admin expenses Fixed OH, selling expenses + admin expenses
Groups expenses according to function
Product cost: GOGS, including variable Groups expense according to cost behaviour
+ fixed product cost Variable expenses of manufacturing, selling
Income
Selling expense: variable and fixed cost + admin
Statement: of selling and distributing product I Fixed expenses of manufacturing (fixed
Admin expense: variable + fixed cost of factory OH), selling + admin.
admin
Generally Accepted Accounting Principles (GAAP) require absorption costing for EXTERNAL
reporting. Financial Accounting Standards Board (FASB), + Revenue Service (IRS) & other regulatory
bodies don’t accept variable costing as a product-costing method for EXTERNAL reporting.
However, variable costing = NB managerial tool for INTERNAL application. Variable costing is useful
in preparing segmented income statements = useful info on variable + fixed expenses.
Only difference between the approaches = treatment of fixed factory OH. As a result, the unit
product cost under absorption costing’s always > unit product cost under variable costing.
Units Ending Inventory = units beginning inventory + units produced – units sold
Value of Ending Inventory = units ending inventory x product cost
Cost of Goods Sold = product cost x units sold
, Example:
During the most recent year, HannaH Inc had the following data associated with their product:
Units in beginning inventory -
Units produced 10 000
Units sold (R300 per unit) 8 000
Variable cost per unit:
Direct materials 50
Direct labour 100
Variable overhead 50
Fixed costs:
Fixed overhead per unit produced 25
Fixed selling and admin 100 000
1. How many units are in ending inventory?
Units Ending Inventory = units beginning inventory + units produced – units sold
= 0 + 10 000 – 8 000 = 2 000 units
2. Using absorption costing, calculate the per-unit product cost.
Absorption Costing Product Cost = DM + DL + variable OH + fixed OH = 50 + 100 + 50 + 25 = R225
3. What is the value of ending inventory according to absorption costing?
Value of Ending Inventory = units ending inventory x product cost = 2 000 x 225 = R450 000
4. Calculate the cost of goods sold under adsorption costing.
Cost of Goods Sold = product cost x units sold = 225 x 8 000 = R1 800 000
5. Prepare an Income Statement using absorption costing.
HannaH Inc
Absorption Costing Income Statement
Sales (300 x 8 000) 2 400 000
,=
-
Cost of Goods Sold (1 800 000)
Gross Margin 600 000
Selling & Admin expense (100 000)
Operating Income - 500 000
6. Using variable costing, calculate the per-unit product cost.
Variable Costing Product Cost = direct materials + direct labour + variable overhead
= 50 + 100 + 50 = R200
7. What is the value of ending inventory according to variable costing?
Value of Ending Inventory = units ending inventory x product cost = 2 000 x 200 = R400 000
8. Calculate the cost of goods sold under variable costing.
Cost of Goods Sold = product cost x units sold Cost of = 200 x 8 000 = R1 600 000
9. Prepare an Income Statement using variable costing.
HannaH Inc
Absorption Costing Income Statement
Sales (300 x 8 000)
Cost of Goods Sold
-(12600
400 000
000)
Contribution Margin 800 000
Fixed expenses:
Fixed OH (25 x 10 000)
Fixed selling & admin
I--
(250 000)
(100 000)
Operating Income 450 000
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