ACTG 321
Agenda for Lecture 11
• The Value Chain and the Cost of
Inventory
• Absorption Costing and Variable
Costing
• The Eskimo Pie Company Example
CAMPBELL’S SOUP COMPANY
CAMPBELL’S SOUP COMPANY
Costs by Business Function
a.k.a. the value chain
R&D
Manufacturing
Marketing,
Distribution,
Sales
Costs Classified By
Business Function
______
R&D
MFG.
GAAP
Marketing,
Distribution,
Sales
PRODUCT
PLANNING
&
PRICING
Cost Flows for a
Manufacturing Firm
Raw Mat.s
Direct
Labor
W.I.P.
F/G Inv.
COGS
Mfg O/H
= Balance
Sheet
account
= expense
account
= Income
Statement
Account
ACTG 321
Agenda for Lecture 11
• The Value Chain and the Cost of
Inventory
• Absorption Costing and Variable
Costing
• The Eskimo Pie Company Example
Two Ways To Treat Fixed
Manufacturing Overhead
• Variable Costing
• Absorption Costing
• Also called Direct
Costing
• Also called Full
Costing
• Fixed Mfg O/H is a • Fixed Mfg O/H is an
Period Cost
Inventoriable Cost
• Focuses on Contri- • Focuses on Gross
bution Margin
Margin
• This isn’t G.A.A.P.
• This is G.A.A.P.
Variable Costing
Absorption Costing
What Costs Are
Included In Inventory?
Non-manufacturing
Costs (eg. selling,
general & admin.)
All variable manufacturing costs (&
any direct, fixed
costs)
Fixed
Manufacturing
Overhead
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.
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.
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.
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
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.
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
Reconciliation of
Variable Costing Income to
Absorption Costing Income
Absorption Costing Income
Variable Costing Income
Difference
$320,000
250,000
70,000
Fixed manufacturing overhead
“absorbed” in ending inventory:
1,000 units x $70 per unit =
70,000
ACTG 321
Agenda for Lecture 11
• The Value Chain and the Cost of
Inventory
• Absorption Costing and Variable
Costing
• The Eskimo Pie Company Example
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.
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 nonmanufacturing costs (selling, general and administrative
costs) are $27,000 per month. Variable nonmanufacturing 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?
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 nonmanufacturing costs (selling, general and administrative
costs) are $27,000 per month. Variable nonmanufacturing 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
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 nonmanufacturing costs (selling, general and administrative
costs) are $27,000 per month. Variable nonmanufacturing 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?
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 nonmanufacturing costs (selling, general and administrative
costs) are $27,000 per month. Variable nonmanufacturing 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
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 nonmanufacturing costs (selling, general and administrative
costs) are $27,000 per month. Variable nonmanufacturing 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
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 nonmanufacturing costs (selling, general and administrative
costs) are $27,000 per month. Variable nonmanufacturing 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.
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 nonmanufacturing costs (selling, general and administrative
costs) are $27,000 per month. Variable nonmanufacturing 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?
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 nonmanufacturing costs (selling, general and administrative
costs) are $27,000 per month. Variable nonmanufacturing 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.)
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
Variable selling expenses
Fixed administrative expenses
Fixed manufacturing overhead
$600,000
$400,000
$400,000
$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.