Costs that are assets when incurred and expenses when sold.
3 types of inventory costing methods.
- 1. Absorption,
- 2. Variable, and
- 3. Throughput costing
The cost accounting choice that determines which costs are treated as inventoriable costs.
The cost accounting choice that focuses on the cost allocation base to set budgeted fixed cost rates.
Denominator-level capacity choice
Choices of capacity levels. (4 of them)
- 1. Theoretical capacity
- 2. Practical capacity
- 3. Normal capacity utilization
- 4. Master-budget capacity utilization
2 most common methods of costing inventories in manufacturing companies.
- 1. Variable costing
- 2. Absorption costing
Costing method in which all manufacturing variable costs are included in inventoriable cost.
Why is variable costing an imprecise term?
Because only variable costs are inventories.
Why is direct costing an imprecise method to describe variable costing?
Because variable costing considers MOH as inventoriable.
Inventory costing method in which all variable and fixed manufacturing costs are included in inventoriable cost.
The basis of the difference between variable and absorption costing is how.... costs are accounted for.
A period-to-period change in op. income under variable costing is due to changes in....
quantity of units sold
Required inventory method for external financial reporting in most countries.
3 reasons many companies use absorption costing for internal purposes as well.
- 1. Cost-effective and less confusing
- 2. Can prevent mgt. from doing things that make their performance look good, but that hurt shareholder's wealth
- 3. Measures the cost of all manufacturing (fixed or variable)
Absorption costing enables mgt. to increase margins and op. income by producing more....
3 disadvantages of absorption costing.
- 1. Not helpful for analysis to improve op. efficiency
- 2. Not good for comparing product lines
- 3. Can skew picture of company's profitability
3 advantages of absorption costing
- 1. Recognizes all costs
- 2. More accurately tracks profit
- 3. Complies w/GAAP
When inventory...., the NI under absorption costing is always higher than variable costing.
When inventory...., NI under variable costing is always higher than absorption costing.
When inventory increases, fixed MOH is.... inventory and when inventory decreases, fixed MOH is.... inventory.
deferred to, released from
4 things mgt can do to reduce undesirable effects of absorption costing.
2. Incorporate a.... for inventory in the internal accounting system
3. Prolong the evaluation of performance from every quarter or year to every....
4. In addition to fin. variables, include.... variables to performance evaluation.
- 1. budgeting/inv. planning
- 2. carrying charge
- 3. 3 to 5 years
- 4. non-financial
Another name for throughput costing.
An extreme form of variable costing in which only DM costs are included as inventoriable costs.
When production exceeds sales,.... costing results in the largest amt. of expenses in the current period.
Advocates of throughput costing says that it provides the least.... for managers to produce for inventory.
Variable costing has been controversial among accountant because of how it affects....
The level of capacity based on producing at full efficiency all the time.
The level of capacity that reduces theoretical capacity by considering unavoidable op. interruptions, such as scheduled maintenance time and shutdowns for holidays.
Theoretical and practical capacity measure capacity in terms of what a plant can....
Normal capacity utilization and master-budget capacity utilization measure capacity level in terms of.... for the output of the plant.
The level of capacity utilization that satisfies avg. customer demand over a period that includes seasonal, cyclical, and trend factors.
Normal capacity utilization
The level of capcity utilization that mgt. expects for the current period.
Master-budget capacity utilization
Formula for budgeted fixed manufact. costs per unit.
budgeted fixed costs per year / budgeted capacity level
The different denominator-level choices for calculating budgeted fixed cost per unit. (5 of them)
- 1. Product costing/Capacity mgt.
- 2. Pricing
- 3. performance evaluation
- 4. External reporting
- 5. Tax requirements
Budgeted fixed cost per unit measures the cost per unit of....
supplying the capacity
Capacity and its costs are fixed in the ....-run.
Continuing reduction in demand for a company's products that occurs when competitor prices are not met. (as demand drops further and further, higher and higher unit costs result in difficulty to meet competitor's prices)
The downward demand spiral
Normal capacity utilization is often used as a basis for.... plans.
Normal capacity utilization depends on the.... selected and the.... made for each year.
time span, forecasts
Normal capacity utilization is an.... that provides.... meaningful feedback to the mkt. manager.
The principal short-run planning and control too.
Differences between practical capacity and master budget capacity utilization.
Planned unused capacity
Formula for production-volume variance.
Budgeted fixed MOH - Fixed MOH allocated using budgeted cost per output unit
3 approaches you can use to dispose of production-volume variances at the end of the period.
- 1. Adjusted allocation rate approach
- 2. Proration approach
- 3. Write off to COGS approach
This production-volume-variance-disposition approach restates all amounts in the general and sub ledgers by using actual cost rates.
Adjusted allocation-rate approach
This production-volume-variance-disposition approach spreads the variance over the WIP, FG, and COGS balances and the balances show what they would've been if actual rates were used.
Op. income is highest when using which capacity level?
Master budget capacity utilization
Occurs when a business eliminates products without sufficiently reducing the overhead costs associated with them.
The Downward Demand Spiral