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Chapter 8

ACTG 2020 Chapter Notes - Chapter 8: Total Absorption Costing, Gross Margin, Profit Margin


Department
Accounting
Course Code
ACTG 2020
Professor
Douglas Kong
Chapter
8

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Chapter 8: Absorption and variable costing, and inventory management
8.1 Variable and absorption income statements
oshow profit of each profit center separately than as an entire corporation
othey refer to the way product costs are determined
othe difference between variable and absorption costing is fixed factory overhead
oabsorption costing assigns all manufacturing costs to the product
-direct materials, direct labour and fixed overhead define the cost of the product
-fixed overhead is viewed as a product cost
-this is assigned through the use of a predetermined overhead rate and is not expensed
until the product is sold
-fixed overhead is an inventoriable cost
ovariable costing assigns only variable manufacturing costs to the product
-this includes direct material, direct labour and variable overhead
-fixed overhead is treated a period cost and expensed in the period they are incurred
-it is excluded from the product cost
oinventory is valued at cost and will never include the period costs of selling administration
ocomputing inventory cost under absorption costing
-units in the ending inventory = units in the beginning inventory + units produced – units
sold
-using absorption costing calculating the per unit product cost: direct material, direct
labour, variable overhead, fixed overhead will equal to unit product cost
-the value at the end of the inventory: units in ending inventory x absorption costing unit
cost
-pricing inventory is necessary to state correctly the total asset of a firm, the gross margin
and the net profit margin.
oComputing inventory under variable costing
-Find the ending inventory units (same method)
-Find the per unit product cost using variable costing
-This will only have direct materials, direct labours, variable overhead = unit product cost
-Value at the end of the inventory is calculated in the same manner
oThere is only fixed overhead under absorption costing
oPreparing an absorption costing income statement
-Data of two years is given to you
-You have to calculate the COGS by absorption unit product cost x units sold for each
year
-Then you have to prepare an income statement all the years provided to you
-This is done by computing the sales for year 1 and year 2
Sales
Less: COGS
Gross Margin
Less: Selling and admin expense
Operating Income
-This is required by GAAP and most regulatory will not accept anything but this
oPreparing a variable costing income statement
-You will be given information for a certain amount of years again
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