Absorption costing ac variable costing vc
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Absorption Costing (AC) & Variable Costing (VC) PowerPoint PPT Presentation


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Absorption Costing (AC) & Variable Costing (VC). Differences between AC and VC Calculation of Product Cost under AC and VC VC and AC : A comparison of their impact on profit Arguments in support of VC Arguments in support of AC. Differences between AC and VC. Absorption Costing

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Absorption Costing (AC) & Variable Costing (VC)

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Absorption costing ac variable costing vc

Absorption Costing (AC) &Variable Costing (VC)

Differences between AC and VC

Calculation of Product Cost under AC and VC

VC and AC : A comparison of their impact on profit

Arguments in support of VC

Arguments in support of AC


Differences between ac and vc

Differences between AC and VC

  • Absorption Costing

  • Assign all manufacturing costs to products

  • Non manufacturing cost treated as period cost i.e excluded from inventory valuation

  • Allowed for external reporting

  • Variable costing

  • Only variable manufacturing costs are assigned to products and included in inventory valuation

  • Fixed manufacturing costs are not assigned to products

  • Only for internal reporting


Calculation of product cost

Calculation of Product Cost

  • Under AC

  • Product Cost

    • Direct Material costs

    • Direct Labour costs

    • Variable Overhead Manufacturing costs

    • Allocated Fixed Manufacturing Overhead


Calculation of product cost1

Calculation of Product Cost

  • Under VC

  • Product Cost

    • Direct Material costs

    • Direct Labour costs

    • Variable Overhead Manufacturing costs


Vc and ac a comparison of their impact on profit

VC and AC : A comparison of their impact on profit

  • Production equals sales

    • AC profit equals VC profits

  • Production exceeds sales

    • AC profit greater than VC profit

  • Sales exceeds production

    • VC profit greater than AC profit


Inventory valuation background

LO 2

INVENTORY VALUATION: Background


Absorption costing

LO 2

ABSORPTION COSTING

Value of ending inventory =

2,000 x RM 225 = RM 450,000


Variable costing

LO 2

VARIABLE COSTING

Value of ending inventory =

2,000 x $ 200 = $ 400,000


Comparative income statements

LO 2

COMPARATIVE INCOME STATEMENTS

Income lower under variable costing where fixed costs are expensed for period.


Absorption income statement

LO 2

ABSORPTION INCOME STATEMENT

COGS =

8,000 x $ 225 = $ 1,800,000


Variable income statement

LO 2

VARIABLE INCOME STATEMENT

Variable costs: 8,000 x $200

Fixes costs: $250,000 + 100,000


Absorption vs variable

LO 2

ABSORPTION VS. VARIABLE

If more is sold than produced, variable costing income > absorption-costing income, opposite of Fairchild situation. Equal production & sales means equal income.


Absorption costing ac variable costing vc

How do variable & absorption costing affect performance evaluation?

Variable costing ensures that direct relationship between sales & income holds whereas absorption costing does not.


Explanation

LO 2

EXPLANATION

The difference between variable costing & absorption costing year to year is equal to the change in fixed overhead.

Under absorption costing, fixed overhead is assigned to inventory produced.

Under variable costing, fixed overhead is a period expense.


Some arguments in support of variable costing

Some arguments in support of Variable Costing

  • VC provides more useful information for decision making

  • VC removes from profit the effect of inventory changes

  • VC avoids fixed overhead being capitalised in unsaleable stocks


Some arguments in support of absorption costing

Some arguments in support of Absorption Costing

  • AC does not understate the importance of Fixed costs

  • AC avoids fictitious losses being reported

  • Fixed overhead are essential for production

  • Consistency with external reporting


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