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The Value Chain and the Cost of Inventory Absorption Costing and Variable Costing The Eskimo Pie Company Example ACTG 321 Agenda for Lecture 11.

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Presentation on theme: "The Value Chain and the Cost of Inventory Absorption Costing and Variable Costing The Eskimo Pie Company Example ACTG 321 Agenda for Lecture 11."— Presentation transcript:

1 The Value Chain and the Cost of Inventory Absorption Costing and Variable Costing The Eskimo Pie Company Example ACTG 321 Agenda for Lecture 11

2 CAMPBELL’S SOUP COMPANY

3

4 Costs by Business Function a.k.a. the value chain R & D Manufacturing Marketing, Distribution, Sales

5 Costs Classified By Business Function ______ R & D PRODUCT MFG. GAAP PLANNING Marketing, & Distribution, Sales PRICING

6 Cost Flows for a Manufacturing Firm Raw Mat.s Direct Labor Mfg O/H W.I.P. F/G Inv. COGS = Balance Sheet account = expense account = Income Statement Account

7 The Value Chain and the Cost of Inventory Absorption Costing and Variable Costing The Eskimo Pie Company Example ACTG 321 Agenda for Lecture 11

8 Two Ways To Treat Fixed Manufacturing Overhead Variable Costing Also called Direct Costing Fixed Mfg O/H is a Period Cost Focuses on Contri- bution Margin This isn’t G.A.A.P. Absorption Costing Also called Full Costing Fixed Mfg O/H is an Inventoriable Cost Focuses on Gross Margin This is G.A.A.P.

9 What Costs Are Included In Inventory? Variable Costing Absorption Costing All variable manu- facturing costs (& any direct, fixed costs) Fixed Manufacturing Overhead Non-manufacturing Costs (eg. selling, general & admin.)

10 Example comparing absorption costing and variable costing 10,000 units are made, 9,000 are sold. Each unit sells for $350. Variable mfg costs are $150 per unit. Fixed mfg costs are $700,000. Variable non-mfg costs are $50 per unit sold. Fixed non-mfg costs are $400,000.

11 Example comparing absorption costing and variable costing 10,000 units are made, 9,000 are sold. Each unit sells for $350. Variable mfg costs: $150 per unit sold. Fixed mfg costs are $700,000. Variable non-mfg costs are $50 per unit. Fixed non-mfg costs are $400,000. Required: Show a Gross Margin Income Statement under Absorption Costing.

12 Absorption Costing Fixed Manufacturing Overhead per unit: $700,000 FMOH ÷ 10,000 units = $70 per unit Total inventoriable cost per unit: $150 variable manufacturing costs + $70 FMOH = $220 per unit.

13 Gross Margin Income Statement Sales (9,000 x $350)$3,150,000 COGS (9,000 x $220) 1,980,000 Gross Margin 1,170,000 Non-manufacturing costs: Fixed 400,000 Variable ($50 x 9,000) 450,000 Income$ 320,000

14 Example comparing absorption costing and variable costing 10,000 units are made, 9,000 are sold. Each unit sells for $350. Variable mfg costs: $150 per unit sold. Fixed mfg costs are $700,000. Variable non-mfg costs are $50 per unit. Fixed non-mfg costs are $400,000. Required: Show a Contribution Margin Income Statement under Variable Costing.

15 Contribution Margin Income Statement Sales (9,000 x $350)$3,150,000 Variable Costs Mfg costs (9,000 x $150) 1,350,000 Non-mfg costs (9K x $50) 450,000 Contribution Margin$1,350,000 Fixed Costs Manufacturing costs 700,000 Non-manufacturing costs 400,000 Income$ 250,000

16 Reconciliation of Variable Costing Income to Absorption Costing Income Absorption Costing Income $320,000 Variable Costing Income 250,000 Difference 70,000 Fixed manufacturing overhead “absorbed” in ending inventory: 1,000 units x $70 per unit = 70,000

17 The Value Chain and the Cost of Inventory Absorption Costing and Variable Costing The Eskimo Pie Company Example ACTG 321 Agenda for Lecture 11

18 The Eskimo Pie Company The Eskimo Pie Company makes and sells the famous Eskimo Pie ice cream bar. The company’s cost structure is as follows: fixed manufacturing overhead costs per month are $50,000. Variable manufacturing costs are $1.40 for each delicious Eskimo Pie. Fixed non-manufacturing costs (selling, general and administrative costs) are $27,000 per month. Variable non-manufacturing costs are $0.10 for each Eskimo Pie sold.

19 The Eskimo Pie Company The Eskimo Pie Company makes and sells the famous Eskimo Pie ice cream bar. The company’s cost structure is as follows: fixed manufacturing overhead costs per month are $50,000. Variable manufacturing costs are $1.40 for each delicious Eskimo Pie. Fixed non- manufacturing costs (selling, general and administrative costs) are $27,000 per month. Variable non- manufacturing costs are $.10 for each Eskimo Pie sold. Required: 1. If the company begins the month with zero inventory, manufactures 20,000 Eskimo Pies, and sells 19,999 Eskimo Pies, what is the cost of ending inventory under Absorption (i.e., Full) Costing?

20 The Eskimo Pie Company The Eskimo Pie Company makes and sells the famous Eskimo Pie ice cream bar. The company’s cost structure is as follows: fixed manufacturing overhead costs per month are $50,000. Variable manufacturing costs are $1.40 for each delicious Eskimo Pie. Fixed non- manufacturing costs (selling, general and administrative costs) are $27,000 per month. Variable non- manufacturing costs are $.10 for each Eskimo Pie sold. 1. If the company begins the month with zero inventory, manufactures 20,000 Eskimo Pies, and sells 19,999 Eskimo Pies, what is the cost of ending inventory under Absorption (i.e., Full) Costing? F.M.O.H. rate = $50,000 ÷ 20,000 pies = $2.50 per pie. $2.50 fixed mfg + $1.40 variable mfg = $3.90 per pie $3.90 per pie x 1 pie = $3.90

21 The Eskimo Pie Company The Eskimo Pie Company makes and sells the famous Eskimo Pie ice cream bar. The company’s cost structure is as follows: fixed manufacturing overhead costs per month are $50,000. Variable manufacturing costs are $1.40 for each delicious Eskimo Pie. Fixed non- manufacturing costs (selling, general and administrative costs) are $27,000 per month. Variable non- manufacturing costs are $0.10 for each Eskimo Pie sold. Required: 2. If the company begins the month with zero inventory, manufactures 20,000 Eskimo Pies, and sells 19,999 Eskimo Pies, what is the cost of ending inventory under Variable Costing?

22 The Eskimo Pie Company The Eskimo Pie Company makes and sells the famous Eskimo Pie ice cream bar. The company’s cost structure is as follows: fixed manufacturing overhead costs per month are $50,000. Variable manufacturing costs are $1.40 for each delicious Eskimo Pie. Fixed non- manufacturing costs (selling, general and administrative costs) are $27,000 per month. Variable non- manufacturing costs are $0.10 for each Eskimo Pie sold. 2. If the company begins the month with zero inventory, manufactures 20,000 Eskimo Pies, and sells 19,999 Eskimo Pies, what is the cost of ending inventory under Variable Costing? $1.40 per pie x 1 pie = $1.40

23 The Eskimo Pie Company makes and sells the famous Eskimo Pie ice cream bar. The company’s cost structure is as follows: fixed manufacturing overhead costs per month are $50,000. Variable manufacturing costs are $1.40 for each delicious Eskimo Pie. Fixed non- manufacturing costs (selling, general and administrative costs) are $27,000 per month. Variable non- manufacturing costs are $0.10 for each Eskimo Pie sold. Required: 3. If the company begins the month with zero inventory, manufactures 20,000 Eskimo Pies, and doesn’t sell any pies, what is net income (loss) for the month under Absorption (i.e., Full) Costing? The Eskimo Pie Company

24 The Eskimo Pie Company makes and sells the famous Eskimo Pie ice cream bar. The company’s cost structure is as follows: fixed manufacturing overhead costs per month are $50,000. Variable manufacturing costs are $1.40 for each delicious Eskimo Pie. Fixed non- manufacturing costs (selling, general and administrative costs) are $27,000 per month. Variable non- manufacturing costs are $0.10 for each Eskimo Pie sold. 3. If the company begins the month with zero inventory, manufactures 20,000 Eskimo Pies, and doesn’t sell any pies, what is net income (loss) for the month under Absorption (i.e., Full) Costing? $27,000 loss (fixed non-mfg costs). (All mfg costs are capitalized in ending inventory, and no variable non-mfg costs have been incurred.

25 The Eskimo Pie Company The Eskimo Pie Company makes and sells the famous Eskimo Pie ice cream bar. The company’s cost structure is as follows: fixed manufacturing overhead costs per month are $50,000. Variable manufacturing costs are $1.40 for each delicious Eskimo Pie. Fixed non- manufacturing costs (selling, general and administrative costs) are $27,000 per month. Variable non- manufacturing costs are $0.10 for each Eskimo Pie sold. Required: 4. If the company begins the month with zero inventory, manufactures 20,000 Eskimo Pies, and doesn’t sell any pies, what is net income (loss) for the month under Variable Costing?

26 The Eskimo Pie Company The Eskimo Pie Company makes and sells the famous Eskimo Pie ice cream bar. The company’s cost structure is as follows: fixed manufacturing overhead costs per month are $50,000. Variable manufacturing costs are $1.40 for each delicious Eskimo Pie. Fixed non- manufacturing costs (selling, general and administrative costs) are $27,000 per month. Variable non- manufacturing costs are $0.10 for each Eskimo Pie sold. 4. If the company begins the month with zero inventory, manufactures 20,000 Eskimo Pies, and doesn’t sell any pies, what is net income (loss) for the month under Variable Costing? $27,000 + $50,000 = $77,000 loss. (The variable mfg costs are capitalized in ending inventory, and no variable non-mfg costs have been incurred.)

27 In its first year of operations, a company made 10,000 units and sold 7,500 units of its sole product, at $350 per unit. Other information follows: Direct manufacturing labor$750,000 Variable manufacturing overhead$400,000 Direct materials$600,000 Variable selling expenses$400,000 Fixed administrative expenses$400,000 Fixed manufacturing overhead$800,000 At the end of Year 1, the CEO predicts that product demand and the cost structure shown above will remain the same in Year 2. The CEO wants to keep the same sales price, uses LIFO, and wants to earn exactly zero profits in Year 2. Is there a production level that will achieve this goal? If so, what is it? Note: This problem is equivalent to 16-7 in the book.


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