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Chapter 8 : Absorption and Variable Costing, and Inventory Management
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Absorption and Variable Costing, and Inventory Management
Amarapron Bovontummatat
Phanga
Korapin
Example Absorption
&
Variable Costing
Example Absorption
&
Variable Costing
Example Absorption Costing
Example Absorption Costing
Calculated absorption costing per unit
DM = 10 $
DL = 15$
OHV = 8$
OHF = 20
Answer
Costing = 10 + 15+ 8 + 20
= 35 $ per unit
Example Variable Costing
Example Variable Costing
Calculated variable costing per unit
DM = 10 $
DL = 15$
OHV = 8$
OHF = 20
Answer
Costing = 10 + 15+ 8
= 33 $ per unit
INCOME STATEMENT
Reporting
Relationships
Relationships
Income statement (Absorption Costing)
Income statement (Absorption Costing)
Income statement (Absorption Costing)
Income statement (Variable Costing)
Absorption
&
Variable Costing
About Absorption Costing
About Absorption Costing
Absorption costing assigns all manufacturing costs to the product.
- Direct materials
- Direct labor
- Variable overhead
- Fixed overhead
define the cost of a product.
Under this method, fixed overhead is assigned to the product through the use of a predetermined fixed overhead rate and is not expensed until the product is sold.
Fixed overhead is an inventoriable cost.
About Variable Costing
About Variable Costing
Variable costing stresses the difference between fixed and variable manufacturing costs.
Variable costing assigns only variable manufacturing costs to the product; these costs include direct materials, direct labor, and variable overhead.
Variable VS Absorption Costing
Variable VS Absorption Costing
Variable VS Absorption Costing
Advantages of Absorption Costing
Advantages of Absorption Costing
Absorption costing offers an advantage when you do not sell all of your manufactured products during the accounting period. You may have finished goods in inventory. Because you assign a per-unit amount for fixed expenses, each product in inventory has a value that includes part of the fixed overhead. You do not show the expense until you actually sell the items in inventory. This can improve your profits for the period.
Disadvantages of Absorption Costing
Disadvantages of Absorption Costing
Absorption costing can artificially inflate your profit figures in any given accounting period. Because you will not deduct all of your fixed overhead if you haven't sold all of your manufactured products, your profit-and-loss statement does not show the full expenses you had for the period. This can mislead you when you are analyzing your profitability.
Advantages of Variable Costing
Advantages of Variable Costing
Absorption costing can artificially inflate your profit figures in any given accounting period. Because you will not deduct all of your fixed overhead if you haven't sold all of your manufactured products, your profit-and-loss statement does not show the full expenses you had for the period. This can mislead you when you are analyzing your profitability.
Disadvantages of Variable Costing
Disadvantages of Variable Costing
Variable costing shows full payment for fixed-overhead expenses for the accounting period. Even if you don’t sell all the products you make, you must deduct the full cost of fixed overhead. This means you show less profit for the period because you show your complete overhead expense even when you haven’t sold all of your products. You show reduced income because of unsold products but full expenses for overhead.
Cost Management
Decision Making for Inventory Management
Inventory can definitely affect operating income.
In addition to the product cost of inventory, there are other types of costs that relate to inventories of raw materials, work in process, and finished goods.
Inventory-Related Costs
Inventory-Related Costs
If the inventory is a material or good purchased from an outside source, then these inventory-related costs are known as ordering costs and carrying costs.
If the material or good is produced internally, then the costs are called setup costs and carrying costs.
Ordering costs are the costs of placing and receiving an order.
Carrying costs are the costs of keeping and storing inventory.
Stockout costs are the costs of not having a product available when demanded by a customer or the cost of not having a raw material available when needed for production.
Economic Order Quantity -EOQ
Economic Order Quantity
The Traditional Model
Economic Order Quantity: The Traditional Model
Once a company decides to carry inventory, two basic questions must be addressed:
How much should be ordered?
When should the order be placed?
In choosing an order quantity, managers need to be concerned only with ordering and carrying costs.
The Traditional Model -calculation
Economic Order Quantity: The Traditional Model
The formulas for calculating these are as follows:
The Traditional Model -calculation
EOQ
Since EOQ is the quantity that minimizes total inventory-related costs, a formula for computing it is:
Reorder Point
Reorder Point
Knowing when to place an order (or setup for production) is also an essential part of any inventory policy.
The reorder point is the point in time when a new order should be placed (or setup started).
It is a function of the EOQ, the lead time, and the rate at which inventory is used.
Lead time is the time required to receive the economic order quantity once an order is placed or a setup is started.
Knowing the rate of usage and lead time allows us to compute the reorder point that accomplishes these objectives:
Safety Stock
Safety Stock
Safety stock is extra inventory carried to serve as insurance against changes in demand.
Safety stock is computed by multiplying the lead time by the difference between the maximum rate of usage and the average rate of usage:
Safety stock = Maximum - Average x Lead time daily usage daily usage
Limitations of Just-in-Time
JIT
Limitations of Just-in-Time Approach
Just-in-Time Approach to Inventory Management
The just-in-time (JIT) approach maintains that goods should be pulled through the system by present demand rather than being pushed through on a fixed schedule based on anticipated demand.
The material or subassembly arrives just in time for production to occur so that demand can be met.
Fast-food restaurants use this type of pull system.
Limitations of Just-in-Time Approach
Limitations of Just-in-Time Approach
JIT does have limitations.
It is often referred to as a program of simplification—yet this does not imply that JIT is simple or easy to implement.
It requires time for building sound relationships with suppliers
Insisting on immediate changes in delivery times and quality may not be realistic and may cause difficult confrontations between a company and its suppliers.
Reductions in inventory buffers may cause a regimented workflow and high levels of stress among production workers.
It requires careful and thorough planning and preparation.