PART 2 A
Part 2A Inventory costing: alternative cost accumulation
systems.
Chapter: 9
● Overview of variable and absorption
costing;
● Capsule comparison of stock costing
methods;
● Effect on financial statements;
● Denominator level capacity concepts;
● Fixed capacity analysis;
● Downward demand spiral.
1. RECAP
RECAP: PERIOD VS PRODUCT COSTING
Inventoriable costs Period costs
- All costs of a product that are - All costs in the income statement other
considered as assets in the balance sheet than COGS. Period costs sare treated s
when they are incurred and that expenses of the accounting period in
become COGS only when the product is which they are incurred because they
sold. are expected to benefit the revenues in
- For manufacturing-sector companies, all that period, and not the revenues from
manufacturing costs are inventoriable future periods.
costs. Manufacturing costs are included -
in work-in-process inventory and in
finished goods inventory: the are
inveentories to accumulate the costs of
creating these assets. Once the
inventories are sold, the cost of
manufacturing them is matched against
revenueas received for products or
services provided. The COGS thus
includes all manufacturing costs - DM,
DL, MOH- incurred to produce the
products. The products may be sold
during a different accounting period
than the period in which they were
manufactured: inventorying
manufacturing costs in the balance sheet
during theaccounting period when
goods are manufactured and expensing
the manufacturing costs in a later
, income statement when the goods are
solf matches revenues and expenses.
- Merchandising sector companies’
inventoriable costs are the costs of
purchasing the goods that are resold in
the same form. COGS are thus: cost of
goods purchased + freight and
insurance.
- Service companies dont have
inventories, thus, they dont have
inventoriable costs.
RECAP: BALANCE SHEET : HOW DID WE CALCULATE THE COGM AND HOW DOES
THE COGM BECOME PART OF THE COGS?
2. VARIABLE COSTING VS ABSORPTION COSTING.
These are two alternatives to account for fixed manufacturing costs and compute the COGM (Cost of
goods manufactured): The difference will rely on the inventoriable cost per unit PRODUCED:
How much the company understands the inventory to cost per unit that they have produced.
What is that inventory composed of?
, ● Absorption costing: companies include variable manufacturing costs AND fixed
manufacturing costs as inventoriable costs(DM+DL+MOH). Inventoriable costs are on the
Balance Sheet until they are sold, recognized in the income statement when the product is
sold.
● Variable costing: companies only include the variable manufacturing costs as inventoriable
costs while the fixed manufacturing costs are included as period costs: Expended
immediately in the income statement independent of the units sold)
Variable costing Absorption costing
A method of inventory A method of inventory
costing in which all costing in which all
variable variable
manufacturing costs manufacturing costs
(both direct and and fixed
indirect) are included manufacturing costs
as inventoriable costs. are included as
inventoriable costs.
All fixed
manufacturing costs
are EXCLUDED
from inventoriable
costs, we treat them
as PERIOD costs.
Only variable
manufacturing costs
are inventories,
whereas variable
nonmanufacturing
costs are treated as
period costs and are
expensed.
MANUFACTURING Variable Included as inventoriable costs. Balance sheet.
COSTS manufacturing costs
Fixed manufacturing Included as period Included as
costs costs.Income inventoriable costs.
statement. Balance sheet.
NON-MANUFACTU Included as period costs. Income statement
RING COSTS: Included as
RESEARCH AND
DEVELOPMENT,
MARKETING
Part 2A Inventory costing: alternative cost accumulation
systems.
Chapter: 9
● Overview of variable and absorption
costing;
● Capsule comparison of stock costing
methods;
● Effect on financial statements;
● Denominator level capacity concepts;
● Fixed capacity analysis;
● Downward demand spiral.
1. RECAP
RECAP: PERIOD VS PRODUCT COSTING
Inventoriable costs Period costs
- All costs of a product that are - All costs in the income statement other
considered as assets in the balance sheet than COGS. Period costs sare treated s
when they are incurred and that expenses of the accounting period in
become COGS only when the product is which they are incurred because they
sold. are expected to benefit the revenues in
- For manufacturing-sector companies, all that period, and not the revenues from
manufacturing costs are inventoriable future periods.
costs. Manufacturing costs are included -
in work-in-process inventory and in
finished goods inventory: the are
inveentories to accumulate the costs of
creating these assets. Once the
inventories are sold, the cost of
manufacturing them is matched against
revenueas received for products or
services provided. The COGS thus
includes all manufacturing costs - DM,
DL, MOH- incurred to produce the
products. The products may be sold
during a different accounting period
than the period in which they were
manufactured: inventorying
manufacturing costs in the balance sheet
during theaccounting period when
goods are manufactured and expensing
the manufacturing costs in a later
, income statement when the goods are
solf matches revenues and expenses.
- Merchandising sector companies’
inventoriable costs are the costs of
purchasing the goods that are resold in
the same form. COGS are thus: cost of
goods purchased + freight and
insurance.
- Service companies dont have
inventories, thus, they dont have
inventoriable costs.
RECAP: BALANCE SHEET : HOW DID WE CALCULATE THE COGM AND HOW DOES
THE COGM BECOME PART OF THE COGS?
2. VARIABLE COSTING VS ABSORPTION COSTING.
These are two alternatives to account for fixed manufacturing costs and compute the COGM (Cost of
goods manufactured): The difference will rely on the inventoriable cost per unit PRODUCED:
How much the company understands the inventory to cost per unit that they have produced.
What is that inventory composed of?
, ● Absorption costing: companies include variable manufacturing costs AND fixed
manufacturing costs as inventoriable costs(DM+DL+MOH). Inventoriable costs are on the
Balance Sheet until they are sold, recognized in the income statement when the product is
sold.
● Variable costing: companies only include the variable manufacturing costs as inventoriable
costs while the fixed manufacturing costs are included as period costs: Expended
immediately in the income statement independent of the units sold)
Variable costing Absorption costing
A method of inventory A method of inventory
costing in which all costing in which all
variable variable
manufacturing costs manufacturing costs
(both direct and and fixed
indirect) are included manufacturing costs
as inventoriable costs. are included as
inventoriable costs.
All fixed
manufacturing costs
are EXCLUDED
from inventoriable
costs, we treat them
as PERIOD costs.
Only variable
manufacturing costs
are inventories,
whereas variable
nonmanufacturing
costs are treated as
period costs and are
expensed.
MANUFACTURING Variable Included as inventoriable costs. Balance sheet.
COSTS manufacturing costs
Fixed manufacturing Included as period Included as
costs costs.Income inventoriable costs.
statement. Balance sheet.
NON-MANUFACTU Included as period costs. Income statement
RING COSTS: Included as
RESEARCH AND
DEVELOPMENT,
MARKETING
