Post Midterm 322

• What is variable costing ?

  Variable costing is a method of cost accounting where only variable manufacturing costs are included in the cost of goods sold.
• What is included in product costs during variable costing?

  Direct materials, direct labor, and variable manufacturing overhead.
• What is included in period costs under variable costing?

  Fixed overhead, SG&A expenses
• What is included as a product cost under absorption costing?

  Direct materials, direct labor, manufacturing overhead and fixed overhead
• What is a period cost under absorption costing?

  SG&A expenses
• Gross margin= Sales- COGS
• Under absorption costing all factory overhead is treated as a product cost that becomes an expense in the form of manufacturing cost of goods sold once sales occur
• Under GAAP absorption costing, selling and administrative expenses are treated as period expenses and deducted from gross margin to obtain operating income
• Under variable costing only variable manufactured costs are treated as product cost. The fixed portion of manufacturing overhead is treated as a period cost.
• Under Variable costing, fixed manufactured overhead costs are written off against income in the year they are incurred.
• How to do a reconciliation of variable and absorption costing

  Variable cost

  Add: Fixed overhead deferred in ending inventory

  Deduct fixed overhead released from beginning inventory

  = Absorption costing OI
• What are the advantages of variable costing?

  Eliminates distortions to income and product cost when volumes change

  • Reduces the dysfunctional incentives to overproduce
• What are the disadvantages of variable costing?

  Fixed and variable costs are subject to manipulation

  Produces misleading cost figures, as managers will have incentives to over consume.

  Not used in financial reporting
• What is budget?

  A plan for using and acquiring financial resources over a future period of time
• The use of Budgets to Control an organizations activity is known as budgetary control
• what is the purpose of budgeting

  • it forces managers to plan
  • it provides resource information that can be used to improve decision making
  • it provides a standard for performance evaluation
  • it improves communication and coordination
• what are the a advantages of budgeting?

  Goal setting

  planning

  resource allocation

  uncover bottlenecks

  coordinate activities

  communicate plans
• what is a participating budget?

  developing a budget in collaboration with lower l level managers
• what are the disadvantages of a collaborative budget?

  budgetary slack
• what is budgetary slack?

  the difference between revenues and expenses a manager believes can be achieved and the amount included
• what are the budgets that have to be completed?

  sales budget

  production budget

  ending finished goods sold

  selling and administrative budget

  production budget

  manufacturing overhead budget

  direct labour budget

  direct materials budget

  cash budget
• sales budget

  • first budget prepared
  • derived from sales forecast
  • prepared by multiplying volume of sales by selling price
• production budget

  • shows units that must be produced to meet sales requirements
  • derived from sales budget plus the desired change in ending fg
• what i s the formula for production budget ?

  desired unit sales +

  desired ending finished goods units -

  beginning finished goods units

  =required production units
• direct materials budget

  shows the quantity and cost of direct materials to be purchases

  • derived from DM quantity required for production from the production budget . plus the desired change in ending DM units
• what is the equation for DM budget?

  unit production X amount of DmM per unit

  + desired ending DM in DM Quantity

  — beginning DM in DM quantity

  = required direct materials to be purchased
• direct labour budget

  does the quantity of hours and cost of direct labour needed to meet production requirements

  • critical in maintaining a labour force that can meet expected production
• direct labour budget cost formula

  units to be produced X direct labour time per unit X direct labour cost per hour
• what are complications with direct labour?

  employment policies may prevent firms from laying off workers as needed. or a certain minimum hours may apply
• Manufacturing OH budget

  shows the expected manufacturing overhead costs for the budgeted period

  shows the expected manufacturing overhead costs for the budgeted period 


  shows the expected manufacting OH for the period

  • Distinguishes fixed and variable OH costs
• S and A Expense Budget

  • Projection of anticipated operating expenses
  • distinguishes fixed and variable costs
• Cash Budget


  shows anticipated cash flows

  considered the most important output of financial budgets
• What are the three sections of the cash budget?

  Cash receipts

  cash disbursements

  financing
• What is in the cash receipts section?


  expected receipts from the principal source of revenue - cash sales or collection of credit sales

  shows expected interests and divided receipts and from sale of investments
• Cash dispursement section of cash budget


  included expected cash payments from DM, DL, Taxes ect
• Financing section of cash budget 


  shows expected borrowing and repayments of borrowed funds plus intrest
• the ending cash balance of one period = beginning cash balance for the next
• cash budgets are often prepared for the year on a monthly basis
• Target cash balance = Excess cash (deficiency) + Borrowing – Interest on borrowing
• Budget Income statements


  the end product of operating budgets

  indicates the expected profitability of operations

  prepared from the operating budget