Chapter 14 Measuring and Assigning Costs for Income Statements

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Chapter 14Measuring and Assigning Costs for
Income Statements

• Key Topics
• Absorption costing
• Variable costing
• Throughput costing
• Reconciling income
• Actual versus normal costing
• Uses and limitations of costing information

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Absorption Costing
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Absorption Costing Income Statement
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Variable Costing
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Variable Costing Income Statement
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Throughput Costing
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Throughput Costing Income Statement
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Asian Iron

• Production10,500 units
• Sales 9,400 units at NT32,900
• Variable direct materials cost NT2,300
• Variable direct labor cost NT3,300
• Variable manufacturing overhead NT2,800
• Variable selling NT940
• Fixed manufacturing overhead NT8,250
• Fixed selling and administrative costs NT14,560

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Asian Iron

• Prepare each of the following income statements
• Absorption
• Variable
• Throughput

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Reconciling the Income Statements

• To reconcile income
• Analyze changes in inventory levels
• Absorption costing inventory includes overhead
  allocation
• Variable costing inventory includes only variable
  costs
• Throughput costing inventory includes only direct
  materials

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Reconciling the Income Statements for Asian Iron

• Assume there is no beginning inventory and
  calculate
• Ending inventory amounts under the absorption,
  variable, and throughput methods
• A reconciliation of variable and throughput
  income to absorption income

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Actual versus Normal Costing

• Actual allocation rate
• Actual overhead/Actual volume
• Normal allocation rate
• Estimated overhead/Estimated volume
• Normal costing requires end of period adjustment
  Volume variance
• Expected overhead - allocated overhead

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Happy Bikers Motorcycle Company

• Following is information about operations at
  Happy Bikers. Price and variable cost
  information is per unit.
• Price is 10,000, raw materials cost is 2,000,
  direct labor and variable overhead is 1,000,
  variable selling and administration is 250.
• Fixed costs are per month and include 40,000 for
  production costs and 35,000 for fixed selling
  and administration.
• There is no beginning inventory, average
  production is 10 motorcycles per month, but last
  month 18 units were produced and 15 were sold.
  For absorption costing, Happy Bikers accountants
  use normal costing with 10 units as the volume
  denominator.

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Happy Bikers Motorcycle Company

• Prepare an absorption costing income statement
  for Happy Bikers using actual costing.
• Prepare an absorption costing income statement
  using normal costing.
• Reconcile the actual and normal income
  statements.
• For the beginning of the next class
• Prepare a variable costing income statement for
  Happy Bikers.
• Prepare a throughput costing income statement for
  Happy Bikers.
• Reconciles the variable and throughput costing
  income statements to the absorption costing
  statement using normal costing.

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Uses and Limitations of Costing Information

• Absorption costing information is GAAP, and
  includes average costs so it is not appropriate
  for decision making
• Variable costing is not GAAP but is useful for
  decision making
• Throughput costing is not GAAP but is useful for
  short-term capacity decision making