Chapter 15: Alternative Inventory Valuation Methods Flashcards
Absorption costing
AKA full costing
Included in cost of inventory:
- direct materials
- direct labor
- variable manufacturing overhead
- fixed manufacturing overhead
Required by GAAP & IRS
Requires OH rate computed for all manufacturing overhead
Gross Margin Income Statement format
Variable costing
Aka direct costing
Included in cost of inventory:
- direct materials
- direct labor
- variable manufacturing overhead
Fixed manufacturing overhead treated as a period expense. (Reasoned as unavoidable cost)
Contribution margin income statement format
Throughput costing
Included in cost of inventory:
- direct materials
Relatively recent costing method
Throughout margin income statement format
Aka super-variable costing
May make sense for companies where most labor and overhead are fixed costs (highly automated). Good for short term, incremental analysis
FMOH
Fixed manufacturing overhead
Gross margin income statement
Revenue Less: cost of goods sold = Gross margin Less: non-manufacturing costs = Operating income
Typical of external reporting income statements
Separates manufacturing from non-manufacturing costs
Contribution margin income statement
Revenues Less: variable costs (direct and overhead AND non-manufacturing) = Contribution Margin Less: fixed costs = Operating income
Facilitate cost-volume profit analysis
Some variable costs will not show on income statement for period incurred due to appearing on balance sheet as inventory costs
Throughput margin
Revenues
Less: direct material costs
= Throughput margin
Statement of Financial Accounting Standards no. 151
To amend and clarify GAAP for calculating inventories under absorption costing
- improve comparability of cross boarder reporting (align with IASB)
Idle facility expense and excessive spoilage must be recognized as current period charges
Fixed manufacturing overhead can be allocated based on actual level of production when actual production approximates normal quantity
Amount of fixed overhead allocated to each unit should not be increased as a consequence of abnormally low production of an idle plant
General and administrative expenses should be included as period charges except for the portion of such expense that may be clearly related to production
Normal capacity (for a production facility)
A range of production levels
The production level expected to be achieved over a number of periods or seasons under normal circumstances, taking into account the loss of capacity resulting from planned maintenance
Some period to period variation is expected
Value chain (manufacturing)
Sequence of events that add value in a company
- research and development
- manufacturing
- marketing
- distribution
- sales
- customer service
(Some might be outsourced)
