Cheatography
https://cheatography.com
A decision making perspective
This is a draft cheat sheet. It is a work in progress and is not finished yet.
Absorption Costing
Product Cost = Variable + Fixed Manufacturing Costs |
Production level impact COGS and inventory costs |
Operating Income fluctuates with production levels |
Used in financial accounting (follows GAAP) |
Net Income higher if units produced > units sold
Net Income lower if units produced < units sold
Net Income equal if units produced = units sold |
Normal Costing
Advantages:
- More timely information than actual costing
- Application of OH cost is simple |
Disadvantages:
- Requires solid forecast numbers for cost and driver
- Sometimes difficult to find a correlating cost driver |
See Inventory Methods Sheet
Costing Method Product Costs
Throughput Costing
Criteria to implement throughput costing:
1 - Conversion Costs are fixed costs and do not vary with production levels
2 - Management needs cost information for short term decisions |
Gross profit and CM replaced with Throughput Margin |
Inventory at the cost of DM (eliminates incentive to produce excess inventory) |
Advantages:
- Reduces build up of excess inventories
- Encourages managers to reduce operating costs |
Disadvantages:
- Useful only in certain industries/organizations |
|
|
Variable Costing
Product Cost = Variable Manufacturing Costs |
Production level have no impact on COGS and cost inventory |
Operating income fluctuates with sales levels |
Used in managerial accounting |
Improves pricing decisions |
Net Income Effects
No change in inventory: production = sales
Absorption net income = Variable net income
Fixed MOH flows through Income Statement
- Variable Costing is a period cost
- Absorption Costing is part of COGS |
Increase in inventory: production > sales
Absorption net income > Variable net income
Absorption: portion of fixed MOH remains on balance sheet's inventory |
Decrease in inventory: production < sales
Absorption net income < Variable net income
Absorption: units manufactured previously are sold, so current fixed MOH flowing to COGS is higher |
Normal Costing Variance
When actual production deviates from production level |
Happens only when absorption costing is used |
Written off to COGS |
Actual production > Budgeted production
Favorable, variance reduces COGS |
Actual production < Budgeted production
Unfavorable, variance increases COGS |
Throughput vs. Variable
Production = Sales |
Variable = Throughput |
Production > Sales |
Variable > Throughput |
Production < Sales |
Variable < Throughput |
|
