ACC 202 Chp. 8

Economic order quantity

-once a company decides to carry inventory two questions must be addressed: -how much should be ordered? -when should the order be placed? ---in choosing an order quantity managers must be concerned with only ordering and carrying costs -the objective is to find the order quantity that minimizes total cost -

production income and sales relationship

-production>sales absorption income>variable income -production<sales absorption income <variable income -production=sales absorption income = variable income

what is the primary difference between variable and absorption costing

inclusion of fixed factory overhead in product costs

inventory values calculated using variable costing as opposed to absorption costing will generally be

less

reorder point calculation

reorder point= rate of usage x lead time

profit centers

separate business units in a company

limitations of JIT approach

-it does have limitations -often reffered to as a program of simplification -yet this does not imply that JIT is simple or easy to implement -it requires time for building sound relationships with suppliers -insisting on immediate changes in delivery times and quality may not be realistic and may cause difficult confrontations between a company and their suppliers -reductions in inventory buffers may cause a regimented work flow and high levels of stress among production workers -it requires careful and thorough planning and preperation

common fixed expenses

-jointly caused by two or more segments -these expenses persist even if one of the segments to which they are common are eliminated -example: depreciation on the corperate head quarters building or the salary of the CEO would be the common fixed expenses for a large company

variable costing vs. absorption costing methods

-GAAP require absorption costing for external reporting -The financial accounting standards board, the internal revenue service, and other regulatory bodies do not accept variable costing as a method for external reporting

segment

-a subunit of a company of sufficient importance to warrant the production of performance reports -segments can be divisions, departments, product lines, customer classes and so on -in segmented income statements fixed expenses are broken into two categories 1. direct fixed expenses 2. common fixed expenses

absorption costing

-assigns all manufacturing costs to a product Cost of a product= direct materials, direct labor, variable overhead, fixed overhead -under this method fixed over head is assigned to the product through the use of a predetermined fixed overhead rate and is not expensed until the product is sold -fixed overhead is a inventioriable cost

formulas for economic order quantity

-average number of units in inventory= units in order/2 -carrying cost = average number of units in inventory x cost of carrying one unit in inventory ordering cost= number of orders per year x cost of placing an order -total inventory - related costs = ordering cost + carrying costs

safety stock

-extra inventory carried to serve as insurance against changes in demand -safety stock is computed by multiplying the lead time by the difference between the maximum rate of usage and the average rate of usage -Safety Stock = (maximum rate of usage - average daily usage) x Lead time

direct fixed expenses

-fixed expenses directly traceable to a segment -these are sometimes refered to as avoidable fixed expenses or traceable fixed expenses because they vanish if the segment is eliminated -ex: if the segments were sales regions, a direct fixed expense for each region would be the rent for the sales office

inventory related costs

-if the inventory is a good or material purchased from an outside source then these inventory related costs are known as ordering costs and carrying costs -if the material or good is produced internally, than the costs are called set up costs and carrying costs -ordering costs are the costs of placing and receiving an order -carrying costs are the costs of keeping and storing inventory -stockout costs; are the costs of not having a product available when demanded by the customer or the cost of not having a raw material available when needed for production

Decision making for inventory management

-inventory can defnitley affect operating income -in addition to product cost of inventory, there are other types of costs that relate to inventories of raw materials work in progress, and finished goods.

variable costing

-stresses the difference between fixed and variable manufactoring costs -variable costing assigns only variable manufacturing costs to the product; these costs include direct materials, direct labor, and variable overhead -fixed overhead is treated as a period expense and is excluded from the product cost -under variable costing, fixed overhead of a period is seen as expiring that period and charged in total against the revenues of the period

Just in time approach to inventory management

-the Just-IN-time (JIT); approach that maintains that goods should be pulled through the system by present demand rather than be pushed through on a fixed schedule based on anticipated demand -the material or sub assembly arrives just in time for production to occur so that sub assembly can be met -fast food resturants use this type of pull system

economic order quantity (EOQ)

-the number of units in the optimal size order quantity

reorder point

-the point in time when a new order should be placed (or set up started) -it is a function of EOQ, the lead time, and the rate at which inventory is used -lead time: the time required to receive the economic order quantity once the order is placed or a set up is started

two methods of computing income

-variable costing -absorption costing j -used to compute income

Figure 8-1. Last year, Fabre Company produced 10,000 units and sold 8,000 units at a price of $24. Costs for last year were as follows: Direct materials $25,000 Direct labor 35,000 Variable factory overhead 12,000 Fixed factory overhead 37,000 Variable selling expense 9,000 Fixed selling expense 7,500 Fixed administrative expense 15,500 Fixed factory overhead is applied based on expected production. Last year, Fabre expected to produce 10,000 units. Refer to Figure 8-1. What is operating income for last year under variable costing? a. $65,400 b. $91,780 c. $82,200 d. $78,400 e. $66,350

A

21,800

Last year, Fabre Company produced 10,000 units and sold 8,000 units at a price of $24. Costs for last year were as follows: Direct materials $25,000 Direct labor 35,000 Variable factory overhead 12,000 Fixed factory overhead 37,000 Variable selling expense 9,000 Fixed selling expense 7,500 Fixed administrative expense 15,500 Fixed factory overhead is applied based on expected production. Last year, Fabre expected to produce 10,000 units. Refer to Figure 8-1. Assuming that beginning inventory was zero, what is the value of ending inventory under absorption costing? a. $5,480 b. $4,500 c. $10,900 d. $21,800 e. $5,750

The GAAP require which of the following accounting methods for external reporting

absorption costing

Figure 8-1. Last year, Fabre Company produced 10,000 units and sold 8,000 units at a price of $24. Costs for last year were as follows: Direct materials $25,000 Direct labor 35,000 Variable factory overhead 12,000 Fixed factory overhead 37,000 Variable selling expense 9,000 Fixed selling expense 7,500 Fixed administrative expense 15,500 Fixed factory overhead is applied based on expected production. Last year, Fabre expected to produce 10,000 units. Refer to Figure 8-1. What is operating income for last year under absorption costing? a. $41,000 b. $72,800 c. $85,900 d. $111,300 e. $45,000

b

Last year, Fabre Company produced 10,000 units and sold 8,000 units at a price of $24. Costs for last year were as follows: Direct materials $25,000 Direct labor 35,000 Variable factory overhead 12,000 Fixed factory overhead 37,000 Variable selling expense 9,000 Fixed selling expense 7,500 Fixed administrative expense 15,500 Fixed factory overhead is applied based on expected production. Last year, Fabre expected to produce 10,000 units. Refer to Figure 8-1. Assuming that beginning inventory was zero, what is the value of ending inventory under variable costing? a. $3,300 b. $2,500 c. $14,400 d. $3,720 e. $7,200

c

gross margin is to absorption costing as blah blah blah is to variable costing

contribution margin

which of the following types of costs is a product cost for absorption costing but a period cost for variable costing?

fixed factory overhead per units sold

all of the following costs are included in absorption costing except

fixed selling expenses