Complete problem 8-21 (parts 1-4 only) and exercises 17-20 to 17-22 in the textbook.
Read chapters 8 and 17
Textbook link http://gcumedia.com/digital-resources/mcgraw-hill/2010/managerial-accounting_ebook_9e.php
Prepare your responses in Excel with each problem on a separate tab and show work for each problem step by step. Write a written explanation. INCLUDE THE formulas in calculations ( each number calculated within excel should have formula in it on the fx(formula bar)). ALSO WRITE IN WORDS HOW YOU GOT THE ANSWER BY SHOWING YOUR WORK
1. Place all answers, both numerical and written, in a single excel spreadsheet.
2. Place each problem into a separate tab or sheet in an Excel file.
3. Place labels on spreadsheet inputs and outputs, and use the yellow highlighter on the top menu bar to highlight your final answer.
4. If the question incorporates graphs, you must replicate the graph on your spreadsheet file.
5. Do not submit Word files or multiple files for a single assignment.
Textbook link http://gcumedia.com/digital-resources/mcgraw-hill/2010/managerial-accounting_ebook_9e.php
You will need to access chapters 8 and 17
Once you open the link, under resource title, click on pdf, this is located on the bottom right, it should download, once its done downloading open the pdf, on the first page it asks for username and password, this is the username and password
OR
Once you open the link, CICK ON THE GLOBE (ON THE BOTTOM RIGHT UNDER DOWNLOAD OPTIONS) ITS CALLED WEB VIEWER, CLICK ON PROCEED AND LOG IN WITH THE INFORMATION GIVEN BELOW.
Username: OAdegunwa
Password: gcuOA0226
or you can use this login and password
username: GSingh1
password: Simarjit88
these log in actually work. You should have no problem accessing the information
Lecture Notes
Product Costing Systems and Cost Allocation
Introduction
The allocation of costs to products is among the most critical processes that the management or cost accountant is involved in. Absorption costing and variable costing are two systems that can be used to allocate manufacturing costs to units of product, and they differ based upon their treatment of fixed manufacturing overhead costs. The allocation of joint costs to the resulting products can be accomplished through several methods. These costing systems and allocation methods are introduced in this lesson.
Absorption and Variable Costing Systems
Manufacturing firms may use either absorption or variable costing to assign costs to units of production. Under absorption costing, fixed manufacturing overhead costs are assigned to units of product as product costs. Under variable costing, fixed manufacturing overhead costs are not assigned to units of product as product costs; rather they are treated as period costs and expensed during the period in which they are incurred.
Timing is the key in distinguishing between absorption and variable costing. All manufacturing costs will ultimately be expensed under either absorption costing or variable costing. The difference between the two methods lies in the time period during which fixed manufacturing overhead costs are expensed. Under variable costing, the fixed manufacturing overhead costs are expensed during the period in which they are incurred. Under absorption costing, fixed manufacturing overhead costs are held in inventory as product costs until the period during which the units are sold. Then those costs flow into cost of goods sold expense.
Under variable costing, the variable costs of direct material, direct labor, and variable overhead are treated as product costs. Fixed manufacturing overhead costs are not treated as product costs. Thus, the important characteristic of a cost that determines whether it is treated as a product cost under variable costing is its cost behavior.
When inventory increases, the income reported under absorption costing will be greater than the income reported under variable costing. This difference results from the fact that under absorption costing, some of the fixed manufacturing costs incurred during the period will not be expensed. In contrast, under variable costing all of the fixed manufacturing costs incurred during the period will be expensed during that period.
Many managers prefer variable costing over absorption costing because income statements prepared under variable costing more closely reflect operations. For example, when sales increase, other things being equal, income will also increase under variable costing. Under absorption costing, however, income will not necessarily increase when sales increase.Under absorption costing, all manufacturing overhead costs (including fixed costs) are assigned to units of product as product costs. Under variable costing, fixed manufacturing overhead costs are not assigned to units of product as product costs; rather they are treated as period costs and expensed during the period in which they are incurred. Under throughput costing, only the unit level spending for direct costs is assigned as a product cost.
Some managerial accountants believe that absorption costing may provide an incentive for managers to overproduce inventory so that the fixed manufacturing overhead costs may be spread over a larger number of product units, thereby lowering the reported product cost per unit. Throughput costing avoids this potential problem by not assigning fixed manufacturing overhead as a product cost.
Variable and absorption costing will not result in significantly different income measures in a just in time (JIT) setting. Under JIT inventory and production management, inventories are minimal and as a result inventory changes are also minimal. Variable and absorption costing result in significantly different income measures only when inventory changes significantly from period to period.
Many managers prefer absorption costing data for cost based pricing decisions. They argue that fixed manufacturing overhead is a necessary cost of production. To exclude this fixed cost from the inventoried cost of a product, as is done under variable costing, is to understate the cost of the product. This, in turn, could lead to setting cost based prices too low.
Variable costing is consistent with cost volume profit (CVP) analysis because it properly reflects the cost behavior of variable and fixed costs (Hilton, 2009). Only variable manufacturing costs are treated as inventorial product costs. Fixed manufacturing costs are recorded as a lump sum and expensed during the period incurred. CVP analysis also properly maintains the cost behavior distinction between variable and fixed costs. In contrast, absorption costing is inconsistent with CVP analysis because fixed overhead is applied to manufactured goods as a product cost on a per unit basis.
An asset is a thing of value owned by the organization with future service potential. By accounting convention, assets are valued at their cost. Since fixed costs comprise part of the cost of production, advocates of absorption costing argue that inventory (an asset) should be valued at its full (absorption) cost of production. Moreover, they argue that these costs have future service potential since the inventory can be sold in the future to generate sales revenue.
Proponents of variable costing argue that the fixed cost component of a product’s absorption costing value has no future service potential. Their reasoning is that the fixed manufacturing overhead costs during the current period will not prevent these costs from having to be incurred again next period. Fixed overhead costs will be incurred every period, regardless of production levels. In contrast, the incurrence of variable costs in manufacturing a product allows the firm to avoid incurring these costs again.
Allocation of Support Activity Costs
A service department is a unit in an organization that is not involved directly in producing the organization’s goods or services. However, a service department provides a service that enables the organization’s production process to take place. Production departments, on the other hand, are units that are directly involved in producing the organization’s goods and services. An example of a service department in a bank would be the computer department or the personnel department. An example of a production department in a bank would be the consumer loan department.
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