Fifth edition Alnoor Bhimani Charles T. Horngren Srikant M. Datar Madhav V. Rajan Farah Ahamed
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| C HAP TE R 7 Income effects of alternative stock-costing methods Teaching tips and points to stress Variable costing and absorption costing Students frequently confuse the distinction between gross margin (GM) and contribution margin CM. There are two differences fixed manufacturing costs and variable non-manufacturing costs. Absorption Costing (AC) expenses total fixed manufacturing costs related to units sold as part of CGS) before obtaining GM. In contrast, variable costing (VC) expenses total fixed manufacturing costs only after obtaining CM. In addition, in AC, all non-manufacturing expenses are subtracted after GM, but in VC, variable non-manufacturing expenses are subtracted before CM. The difference between VC and AC operating profits is a matter of timing. Under VC, fixed manufacturing costs are expensed in the period incurred. Under AC, fixed manufacturing costs are inventoried and are not expensed until the related units are sold. VC IS use the CM approach that highlights the distinction between VC and FC that is central to variable costing. The CM approach emphasises the lump sum FC that is expensed in the period incurred. In contrast, AC IS use the gross margin approach that distinguishes between manufacturing and non-manufacturing costs. VC is not acceptable for tax or external financial reporting inmost countries. If VC is used, it must be run in addition to some type of absorption costing system. Surveys show that 30–50% of companies use VC for some internal reports. Thus, for many companies, the benefits of VC must outweigh the cost of running a VC system and making yearly adjustments to conform to external reporting requirements. Ask students, When are the benefits of VC likely to outweigh its costs Ans When VC tells us something new – i.e. when it gives an answer different from AC, What factors increase the magnitude of the difference between AC and VC profit Ans High fixed manufacturing costs otherwise it does not matter much how you account for them) and large fluctuations in stock levels (if stock levels are stable, there is less difference between fixed manufacturing costs embedded in opening versus closing stocks Download 1.72 Mb. Share with your friends:
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