The Value Chain and the Cost of Inventory

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ACTG 321Agenda for Lecture 11

• The Value Chain and the Cost of Inventory
• Absorption Costing and Variable Costing
• The Eskimo Pie Company Example

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CAMPBELLS SOUP COMPANY
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CAMPBELLS SOUP COMPANY
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Costs by Business Functiona.k.a. the value chain

• R D
• Manufacturing
• Marketing,
• Distribution,
• Sales

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Costs Classified By Business Function

• ______
• R D
• PRODUCT
• MFG. GAAP
• PLANNING
• Marketing,
• Distribution,
• Sales PRICING

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Cost Flows for a Manufacturing Firm
Raw Mat.s
Direct Labor
W.I.P.
F/G Inv.
COGS
Mfg O/H
Income Statement Account
Balance Sheet account
expense account
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ACTG 321Agenda for Lecture 11

• The Value Chain and the Cost of Inventory
• Absorption Costing and Variable Costing
• The Eskimo Pie Company Example

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Two Ways To Treat Fixed Manufacturing Overhead

• Variable Costing
• Also called Direct Costing
• Fixed Mfg O/H is a Period Cost
• Focuses on Contri-bution Margin
• This isnt G.A.A.P.

• Absorption Costing
• Also called Full Costing
• Fixed Mfg O/H is an Inventoriable Cost
• Focuses on Gross Margin
• This is G.A.A.P.

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What Costs Are Included In Inventory?
Non-manufacturing Costs (eg. selling, general
admin.)
All variable manu- facturing costs ( any direct,
fixed costs)
Variable Costing
Absorption Costing
Fixed Manufacturing Overhead
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Example comparing absorption costing and variable
costing
10,000 units are made, 9,000 are sold. Each unit
sells for 350. Variable mfg costs are 150 per
unit. Fixed mfg costs are 700,000. Variable
non-mfg costs are 50 per unit sold. Fixed
non-mfg costs are 400,000.
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Example comparing absorption costing and variable
costing
10,000 units are made, 9,000 are sold. Each unit
sells for 350. Variable mfg costs 150 per unit
sold. Fixed mfg costs are 700,000. Variable
non-mfg costs are 50 per unit. Fixed non-mfg
costs are 400,000. Required Show a Gross
Margin Income Statement under Absorption Costing.
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Absorption Costing
Fixed Manufacturing Overhead per unit 700,000
FMOH 10,000 units 70 per unit Total
inventoriable cost per unit 150 variable
manufacturing costs 70 FMOH 220 per unit.
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Gross Margin Income Statement
Sales (9,000 x 350) 3,150,000 COGS (9,000 x
220) 1,980,000 Gross Margin
1,170,000 Non-manufacturing costs Fixed
400,000 Variable (50 x 9,000)
450,000 Income 320,000
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Example comparing absorption costing and variable
costing
10,000 units are made, 9,000 are sold. Each unit
sells for 350. Variable mfg costs 150 per unit
sold. Fixed mfg costs are 700,000. Variable
non-mfg costs are 50 per unit. Fixed non-mfg
costs are 400,000. Required Show a
Contribution Margin Income Statement under
Variable Costing.
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Contribution Margin Income Statement
Sales (9,000 x 350) 3,150,000 Variable Costs
Mfg costs (9,000 x 150) 1,350,000 Non-mfg
costs (9K x 50) 450,000 Contribution
Margin 1,350,000 Fixed Costs Manufacturing
costs 700,000 Non-manufacturing costs
400,000 Income 250,000
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Reconciliation of Variable Costing Income to
Absorption Costing Income
Absorption Costing Income 320,000 Variable
Costing Income 250,000 Difference
70,000 Fixed manufacturing
overhead absorbed in ending inventory 1,000
units x 70 per unit 70,000
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ACTG 321Agenda for Lecture 11

• The Value Chain and the Cost of Inventory
• Absorption Costing and Variable Costing
• The Eskimo Pie Company Example

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The Eskimo Pie Company
The Eskimo Pie Company makes and sells the famous
Eskimo Pie ice cream bar. The companys cost
structure is as follows fixed manufacturing
overhead costs per month are 50,000. Variable
manufacturing costs are 1.40 for each delicious
Eskimo Pie. Fixed non-manufacturing costs
(selling, general and administrative costs) are
27,000 per month. Variable non-manufacturing
costs are 0.10 for each Eskimo Pie sold.
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The Eskimo Pie Company
The Eskimo Pie Company makes and sells the famous
Eskimo Pie ice cream bar. The companys cost
structure is as follows fixed manufacturing
overhead costs per month are 50,000. Variable
manufacturing costs are 1.40 for each delicious
Eskimo Pie. Fixed non-manufacturing costs
(selling, general and administrative costs) are
27,000 per month. Variable non-manufacturing
costs are .10 for each Eskimo Pie sold.
Required 1. If the company begins the month
with zero inventory, manufactures 20,000 Eskimo
Pies, and sells 19,999 Eskimo Pies, what is the
cost of ending inventory under Absorption (i.e.,
Full) Costing?
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The Eskimo Pie Company
The Eskimo Pie Company makes and sells the famous
Eskimo Pie ice cream bar. The companys cost
structure is as follows fixed manufacturing
overhead costs per month are 50,000. Variable
manufacturing costs are 1.40 for each delicious
Eskimo Pie. Fixed non-manufacturing costs
(selling, general and administrative costs) are
27,000 per month. Variable non-manufacturing
costs are .10 for each Eskimo Pie sold. 1.
If the company begins the month with zero
inventory, manufactures 20,000 Eskimo Pies, and
sells 19,999 Eskimo Pies, what is the cost of
ending inventory under Absorption (i.e., Full)
Costing? F.M.O.H. rate 50,000 20,000 pies
2.50 per pie. 2.50 fixed mfg 1.40 variable
mfg 3.90 per pie 3.90 per pie x 1 pie 3.90
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The Eskimo Pie Company
The Eskimo Pie Company makes and sells the famous
Eskimo Pie ice cream bar. The companys cost
structure is as follows fixed manufacturing
overhead costs per month are 50,000. Variable
manufacturing costs are 1.40 for each delicious
Eskimo Pie. Fixed non-manufacturing costs
(selling, general and administrative costs) are
27,000 per month. Variable non-manufacturing
costs are 0.10 for each Eskimo Pie sold.
Required 2. If the company begins the month
with zero inventory, manufactures 20,000 Eskimo
Pies, and sells 19,999 Eskimo Pies, what is the
cost of ending inventory under Variable Costing?
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The Eskimo Pie Company
The Eskimo Pie Company makes and sells the famous
Eskimo Pie ice cream bar. The companys cost
structure is as follows fixed manufacturing
overhead costs per month are 50,000. Variable
manufacturing costs are 1.40 for each delicious
Eskimo Pie. Fixed non-manufacturing costs
(selling, general and administrative costs) are
27,000 per month. Variable non-manufacturing
costs are 0.10 for each Eskimo Pie sold.
2. If the company begins the month with zero
inventory, manufactures 20,000 Eskimo Pies, and
sells 19,999 Eskimo Pies, what is the cost of
ending inventory under Variable Costing? 1.40
per pie x 1 pie 1.40
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The Eskimo Pie Company
The Eskimo Pie Company makes and sells the famous
Eskimo Pie ice cream bar. The companys cost
structure is as follows fixed manufacturing
overhead costs per month are 50,000. Variable
manufacturing costs are 1.40 for each delicious
Eskimo Pie. Fixed non-manufacturing costs
(selling, general and administrative costs) are
27,000 per month. Variable non-manufacturing
costs are 0.10 for each Eskimo Pie sold.
Required 3. If the company begins the month
with zero inventory, manufactures 20,000 Eskimo
Pies, and doesnt sell any pies, what is net
income (loss) for the month under Absorption
(i.e., Full) Costing?
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The Eskimo Pie Company
The Eskimo Pie Company makes and sells the famous
Eskimo Pie ice cream bar. The companys cost
structure is as follows fixed manufacturing
overhead costs per month are 50,000. Variable
manufacturing costs are 1.40 for each delicious
Eskimo Pie. Fixed non-manufacturing costs
(selling, general and administrative costs) are
27,000 per month. Variable non-manufacturing
costs are 0.10 for each Eskimo Pie sold.
3. If the company begins the month with zero
inventory, manufactures 20,000 Eskimo Pies, and
doesnt sell any pies, what is net income (loss)
for the month under Absorption (i.e., Full)
Costing? 27,000 loss (fixed non-mfg costs).
(All mfg costs are capitalized in ending
inventory, and no variable non-mfg costs have
been incurred.
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The Eskimo Pie Company
The Eskimo Pie Company makes and sells the famous
Eskimo Pie ice cream bar. The companys cost
structure is as follows fixed manufacturing
overhead costs per month are 50,000. Variable
manufacturing costs are 1.40 for each delicious
Eskimo Pie. Fixed non-manufacturing costs
(selling, general and administrative costs) are
27,000 per month. Variable non-manufacturing
costs are 0.10 for each Eskimo Pie sold.
Required 4. If the company begins the month
with zero inventory, manufactures 20,000 Eskimo
Pies, and doesnt sell any pies, what is net
income (loss) for the month under Variable
Costing?
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The Eskimo Pie Company
The Eskimo Pie Company makes and sells the famous
Eskimo Pie ice cream bar. The companys cost
structure is as follows fixed manufacturing
overhead costs per month are 50,000. Variable
manufacturing costs are 1.40 for each delicious
Eskimo Pie. Fixed non-manufacturing costs
(selling, general and administrative costs) are
27,000 per month. Variable non-manufacturing
costs are 0.10 for each Eskimo Pie sold.
4. If the company begins the month with zero
inventory, manufactures 20,000 Eskimo Pies, and
doesnt sell any pies, what is net income (loss)
for the month under Variable Costing? 27,000
50,000 77,000 loss. (The variable mfg costs
are capitalized in ending inventory, and no
variable non-mfg costs have been incurred.)
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In its first year of operations, a company made
10,000 units and sold 7,500 units of its sole
product, at 350 per unit. Other information
follows Direct manufacturing labor 750,000 Va
riable manufacturing overhead 400,000 Direct
materials 600,000 Variable selling
expenses 400,000 Fixed administrative
expenses 400,000 Fixed manufacturing
overhead 800,000 At the end of Year 1, the CEO
predicts that product demand and the cost
structure shown above will remain the same in
Year 2. The CEO wants to keep the same sales
price, uses LIFO, and wants to earn exactly zero
profits in Year 2. Is there a production level
that will achieve this goal? If so, what is it?
Note This problem is equivalent to 16-7 in the
book.