Chapter 09; Inventory Costing and Capacity Analysis.
Difference between inventoriable1 cost and period cost 2
1. Cost of inventory production that is capitalize that is included in the inventory within the
company balance sheet
2. Is the part of the cost that is included in the operating expense of firm and it’s not
capitalize
What is the Relationships between the volume of production and the capacity capitalization
cost of production?
Production is high the cost of production while be lower  kel ma nkun efficient in capacity kel
ma ykun cosr of production higher
There is two or three choices in the inventory costing while producing some inventory
Variable costing is a method of inventory costing in which all variable manufacturing costs (direct and
indirect) are included as inventoriable costs. All fixed manufacturing costs are excluded from
inventoriable costs and are instead treated as costs of the period in which they are incurred.
Absorption costing is a method of inventory costing in which all-variable manufacturing costs and all
fixed manufacturing costs are included as inventoriable costs. That is, inventory “absorbs” all
manufacturing costs.  I did not differentiate between whether the cost is variable or fixed I included
in the inventory value all cost that are related to production whether they are fixed or variable cost.
Throughput costing – only direct materials are capitalized; all other costs are expensed.
Variable vs. Absorption Costing Operating Income and Income Statements
 Operating income will differ between absorption and variable cost 
Fixed cost in variable costing are debited as an expense but in absorption are
debited as inventory, which method yield lower expenses of the date of
capitalization?
Since we are capitalizing the inventoriable cost whether are fixed or variable
under the absorption method compare to expensing the cost under the variable
and the date of capitalization the absorption will yield lower expense and higher
profit.
 The amount of the difference represents the amount of fixed
manufacturing cots capitalized as inventory under absorption costing and
expensed as a period cost under variable costing
 If inventory levels change operating income will differ between the two
methods because of t=he difference in accounting for fixed manufacturing
cost
The some of your BE and the
manufacturing cost ‘variable
‘and ‘fixed’.
Comparing income statements
The some of
your BE and the
manufacturing
cost ‘variable ‘.
Variable marketing expense
Gross margin = Revenue – cost of goods sold
Throughput costing (super-variable costing) is a method of inventory costing in which only
direct material costs are included as inventory costs. All other product costs are treted as
period expenses.
Throughput margin = revenue - direct material cost of goods sold.
CM = Revenue – VC
TP = Revenue – DM
Throughput margin will be higher or lower than contribution
margin.
Higher because direct material are less than the variable cost
Capacity levels
Quantity produced It is the denominator of cost per unit
The choice of capacity level used to allocated budgeted fixed manufacturing costs to products
can greatly affect operating income.
Capacity change the cost of production per unit, whenever the capacity capitalization
increases that I can use my resources more efficiently this will yield higher profitability
through lower cost of production.
Cost per unit =
𝑡𝑜𝑡𝑎𝑙 𝑐𝑜𝑠𝑡
FC+VC
𝑞
Vc = increase
FC= Remains the same
This why as Q increases  cost per unit decreases and vice versa.
Four different capacity levels used as the denominator to compute the budgeted fixed manufacturing
cost rate:




theoretical capacity
practical capacity
normal capacity utilization
master-budget capacity utilization
Theoretical capacity is the level of capacity based on producing at full efficiency all the time.
It is theoretical in the sense that it does not allow for any slowdowns due to plant maintenance,
shutdown periods, or interruptions because of downtime on the assembly lines. Theoretical capacity
levels are unattainable in the real world, but they represent the ideal goal of capacity utilization a
company can aspire to.
Example: Stassen can produce 25 units per shift when the production lines are operating at maximum
speed. If we assume 360 days per year, the theoretical annual capacity for two shifts per day is as
follows:
25 units per shift * 2 shifts per day * 360 days = 18,000 units
Practical capacity is the level of capacity that reduces theoretical capacity by considering unavoidable
operating interruptions, such as scheduled maintenance time and shutdowns for holidays.
Engineering and human resource factors are both important when estimating theoretical or practical
capacity. Engineers at the Stassen facility can provide input on the technical capabilities of machines
for cutting and polishing lenses. Human resources can evaluate employee safety factors, such as
increased injury risk when the line operates at faster speeds.
Measure of capacity
Supply or demand
Both theoretical capacity and practical capacity measure capacity levels in terms of what a plant can
supply—available capacity. --> Whether I am using the theoretical or practical measure capacity I am
trying to anticipate how much I have resources and manufacturing warehouse can supply can produce
products. This is the supply part how much we are able to produce using available resources.
If you are using the theoretical capacity,  you are able to produce more than the real production
(overstated)
Normal Capacity Utilization and Master-Budget Capacity Utilization
Normal capacity utilization is the level of capacity utilization that satisfies average
Customer demand over a period (say, two to three years) that includes seasonal, cyclical,
And trend factors. Master-budget capacity utilization is the level of capacity utilization
That manager expect for the current budget period, which is typically one year. These
Two capacity-utilization levels can differ quite significantly in industries that face cyclical
Demand patterns.
We are focusing on the demand