w
 

1- BILAL ASIF SP10-MM-0026

2- MUHAMMAD GHAZANFAR SP10-MM-0063

3- SYED MURTAZA ALI SP10-MM-0121

Ê


 
O Location- Ireland
O Owner- Marry Oǯ Meara
O Size- Small company having 10 employees only
O Business- Manufacturing
O Product- Traditional wool fishermanǯs sweater
O Selling places- In department stores and clothing store
chains
O Accountant- Sean MacLafferty

 

Ê

O Grows at faster pace in the mid 17th century

O Declined in the 18th century

O Stagnated in the first half of the 19th century

O Sheep population today is around 3.5 million




 
O ABSORPTION/FULL COSTING
O Product cost includes DM, DL, VMOH and FMOH
O Closing inventory on full cost
O Opening inventory for the next period
O Follow accounting rules for external reporting
O VARIABLE/MARGINAL COSTING
O Product cost includes DM, DL and VMOH
O Closing Inventory on variable cost
O Opening inventory for next period
O Rules regarding the internal reporting for decision making
O PRODUCT COST
O It is the cost directly attributable to the product
O In absorption costing the fixed manufacturing overhead is
included in the product cost
O In variable costing fixed manufacturing is not considered as
the part of the product cost
O PERIOD COST
O It is the cost which relates to the period of production
O In absorption costing other costs such as administration,
selling, distribution etc. considered as period cost
O In variable costing besides other cost the fixed manufacturing
overhead is also considered as the period cost
  


  
Ê
IF,
1- Production = Sales
AC NI = VC NI

2- Production > Sales

AC NI > VC NI

3- Production < Sales

AC NI < VC NI
Ê Ê 



ÊÊ

ABSORPTION VARIABLE
DM DM
DL DL
VMOH VMOH
FMOH --------
Product Cost Product Cost

 


Ê

w
 w Ê 


 
w
O One real and one hypothetical example clarifies the
misguiding of the absorption costing for the business
decision making
O Through absorption costing the decision maker has
left with the unanswerable queries
O If production is high the net income is high even the
sales remain the same
O Manager wonders for the reasons whether low selling
price, more efficient operations or other factors
 Ê Ê


BASIC DATA Rs.
Selling / unit 20
VMC / unit 7
FMOH / unit 150,000
V S&A / unit 1
F S&A / unit 90,000

YEAR 1 YEAR 2 YEAR Ô TOTAL

Units in beginning inventory 0 0 5000 -----
Units produced 25,000 25,000 25,000 75,000
Units sold 25,000 20,000 30,000 75,000
Units in ending inventory 0 5,000 0 -----

ÊÊ

ABSORPTION VARIABLE
7 7
6 --
13 7

ñ For all three years

 


Ê

w
Rs.
YEAR 1 YEAR2
Sales 500,000 400,000
Less: COGS
Beg. Inv. 0 0
Add: COGM(25000*13) 325,000 325,000
GAFS 325,000 325,000
Less: End. Inv. 0 65,000
COGS 325,000 260,000
Gross Margin 175,000 140,000
Less: S&A Expenses 115,000 110,000
Net Operating Income 60,000 30,000
 Rs.
YEAR Ô TOTAL
Sales 600,000 1,500,000
Less: COGS
Beg. Inv. 65,000 --
Add: COGM(25000*13) 325,000 975,000
GAFS 390,000 975,000
Less: End. Inv. 0 --
COGS 390,000 975,000
Gross Margin 210,000 525,000
Less: S&A Expenses 120,000 345,000
Net Operating Income 90,000 180,000
 ^ Ê

w
Rs.
YEAR 1 YEAR2
Sales 500,000 400,000
Less: VCOGS
Beg. Inv. 0 0
Add: VCOGM(25000*7) 175,000 175,000
GAFS 175,000 175,000
Less: End. Inv. 0 35,000
VCOGS 175,000 140,000
Add: V S&A Expenses 25,000 200,000 20,000 160,000
Contribution Margin 300,000 240,000
Less: Fixed Expenses
FMOH 150,000 150,000
F S&A Expenses 90,000 240,000 90,000 240,000
Net Operating Income 60,000 0
 Rs.
YEAR Ô TOTAL
Sales 600,000 1,500,000
Less: VCOGS
Beg. Inv. 35,000 --
Add: VCOGM(25000*7) 175,000 525,000
GAFS 210,000 525,000
Less: End. Inv. 0 --
VCOGS 210,000 525,000
Add: V S&A Expenses 30,000 240,000 75,000 600,000
Contribution Margin 360,000 900,000
Less: Fixed Expenses
FMOH 150,000 150,000
F S&A Expenses 90,000 240,000 90,000 720,000
Net Operating Income 120,000 180,000
 Ê

Ê  

YEAR1 YEAR2 YEARÔ

Variable Costing Net Income 60,000 0 120,000
Add: Deferred cost in inventory 0 30,000 0
under absorption costing
(5,000*6)
Less: Released cost in inventory 0 0 30,000
under absorption costing
(5,000*6)
Absorption Costing Net Income 60,000 30,000 90,000

 Ê Ê


BASIC DATA Rs.
Selling / unit 25
VMC / unit 10
FMOH / unit 300,000
V S&A / unit 1
F S&A / unit 200,000

YEAR 1 YEAR 2 YEAR Ô TOTAL

Units in beginning inventory 0 0 10,000 -----
Units produced 40,000 50,000 30,000 120,000
Units sold 40,000 40,000 40,000 120,000
Units in ending inventory 0 10,000 0 -----
 
ÊÊ

ABSORPTION VARIABLE

YEAR1 YEAR2 YEARÔ

VMC 10 10 10 10
FMOH 7.5 6 10 --
TOTAL 17.5 16 20 10
 


Ê

w
Rs.
YEAR 1 YEAR2
Sales 1,000,000 1,000,000
Less: COGS
Beg. Inv. 0 0
Add: COGM 700,000 800,000
GAFS 700,000 800,000
Less: End. Inv. 0 160,000
COGS 700,000 640,000
Gross Margin 300,000 360,000
Less: S&A Expenses 240,000 240,000
Net Operating Income 60,000 120,000
 Rs.
YEAR Ô TOTAL
Sales 1,000,000 3,000,000
Less: COGS
Beg. Inv. 160,000 --
Add: COGM 600,000 2,100,000
GAFS 760,000 2,100,000
Less: End. Inv. 0 --
COGS 760,000 2,100,000
Gross Margin 240,000 900,000
Less: S&A Expenses 240,000 720,000
Net Operating Income 0 180,000
 ^ Ê

w
Rs.
YEAR 1 YEAR2
Sales 1,000,000 1,000,000
Less: VCOGS
Beg. Inv. 0 0
Add: VCOGM 400,000 500,000
GAFS 400,000 500,000
Less: End. Inv. 0 100,000
VCOGS 400,000 400,000
Add: V S&A Expenses 40,000 440,000 40,000 440,000
Contribution Margin 560,000 560,000
Less: Fixed Expenses
FMOH 300,000 300,000
F S&A Expenses 200,000 500,000 200,000 500,000
Net Operating Income 60,000 60,000
 Rs.
YEAR Ô TOTAL
Sales 1,000,000 3,000,000
Less: VCOGS
Beg. Inv. 100,000 --
Add: VCOGM 300,000 1,200,000
GAFS 400,000 1,200,000
Less: End. Inv. 0 --
VCOGS 400,000 1,200,000
Add: V S&A Expenses 40,000 440,000 120,000 1,220,000
Contribution Margin 560,000 1,680,000
Less: Fixed Expenses
FMOH 300,000 900,000
F S&A Expenses 200,000 500,000 600,000 1,500,000
Net Operating Income 60,000 180,000
 Ê

Ê  

YEAR1 YEAR2 YEARÔ

Variable Costing Net Income 60,000 60,000 60,000
Add: Deferred cost in inventory 0 60,000 0
under absorption costing
(10,000*6)
Less: Released cost in inventory 0 0 60,000
under absorption costing
(10,000*6)
Absorption Costing Net Income 60,000 120,000 0
ANY
QUESTIONS
????????????????