what is absorption costing?
traces all manufacturing costs to products and treats all non-manufacturing costs as a period cost
what is variable costing?
traces all variable costs to products and treats fixed overheads as a period cost. no under/overapplication.
the effect of o/b and c/b on profit in absorption?
greater c/b = lower COS = greater profit
greater o/b = higher COS = lower profit
income statement format A vs V?
A = gross profit V = contribution
advantages of AC?
- is in line with IFRS
- closes matches costs to revenue – recognizes the importance of fixed costs
- fixed costs are important for production and should be assigned to products
advantages of VC?
- data required for CVP analysis can be taken from CM
- profit for the period is not affected by stock changes
- emphasizes the impact of fixed costs on profits
- useful for internal management reports
reconciling profits?
- deals with FMOH in the o/c inventory
how to reconcile when starting with abs?
add o/b
less c/b
how to reconcile when starting with var?
less o/b
add c/b
what is budgeted capacity?
the activity level based on the capacity utilization required for the next budget period
what is normal capacity?
a measure of capacity required to satisfy average customer demand over a longer-term period after taking into account seasonal and cyclical fluctuations
what is practical capacity?
theoretical capacity less activity lost arising from unavoidable interruptions
what is theoretical maximum capacity?
a measure of maximum operating capacity based on 100 percent efficiency with no interruptions for maintenance or other factors
what is volume variance?
refers to the under or over recovery of fixed overheads arising from actual activity being different from the activity level used to calculate the fixed overhead rate
what is a period cost adjustment?
the record of under and over recovery of fixed overheads at the end of a period
