ACCAspace ACCA F5. Provided by ACCA Research Institute. Performance Management (PM) 绩效管理 ACCA Lecturer: Lethe Zheng

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1 ACCAspace Provided by ACCA Research Institute ACCA F5 Performance Management (PM) 绩效管理 ACCA Lecturer: Lethe Zheng

2 Overview Costing Absorption Costing Marginal Costing OAR Contribution Under/Over Absorption Reconciliation of Profit 2

3 F5 Chapter 1 Contents 1 Absorption Costing 2 Marginal Costing 3 Absorption Costing vs. Marginal Costing 3

4 Absorption Costing A method whereby all production costs are included in the costing of a cost unit, i.e. direct materials, direct labour, variable production overheads and fixed production overheads. ISA2 requires an element of fixed production overhead to be absorbed into product cost for inventory valuation purposes. All production costs are charged to units of production. Materials Labour Expenses PRODUCTION COSTS DIRECT COSTS INDIRECT COSTS (overheads) Work out direct cost per unit and put it into cost card Allocate and apportion to cost centres (departments) Dept A Dept B Dept C Reapportion service centre costs to production centres Cost per unit Dept A Indirect cost per unit Dept B Indirect cost per unit 4

5 Absorption Costing Cost Card $ Direct materials: Blank CD 0.50 Box 0.50 Direct labour 3.00 Direct expense: Royalties 1.00 PRIME (direct) COST 5.00 Indirect production costs? TOTAL PRODUCTION COST? Three Step Process: (1) Allocate/apportion overheads to cost centres (2) Re-apportion service centre costs to production cost centres (3) Absorb into production 5

6 Absorption Costing For example: Total overheads are $20,000 (1) Allocate: Pressing & Packing supervisors and a chef Total $10,000 Pressing $5,000 Packing $3,000 Canteen $2,000 Apportion: Rent based on floor space $10,000 across 1,000 m 2 $10, m 2 $5, m 2 $3, m 2 $2,000 (2) Re-apportion Total $ Total production overheads Split canteen based on No. employees (80% pressing, 20% packing) Pressing $ Packing $ Canteen $ 20,000 10,000 6,000 4,000 3, (4,000) 20,000 13,200 6,800 (4,000) 6

7 Absorption Costing O.A.R= Estimated overhead costs Expected(normal)activity level Bases (a) Per unit (b) Per direct labour hour (c) Per machine hour (d) Percentage of direct materials cost (e) Percentage of direct labour cost (f) Percentage of prime cost Add to cost card Most frequently used in exams 7

8 Absorption Costing Pressing Packing DVD 1 hr ¼ hr CD ½ hr ¼ hr Pressing Packing Produce 10,000 DVDs 10,000 labour hours 2,500 labour hours Produce 10,000 CDs 5,000 labour hours 2,500 labour hours 15,000 labour hours 5,000 labour hours OAR Pressing = $13,200/15,000 labour hours = $0.88/hr Packing = $6,800/5,000 labour hours = $1.36/hr 8

9 Absorption Costing So, DVD OAR: Pressing (1hr*$0.88) = $0.88 Packing (1/4hr*$1.36) = $0.34 $1.22 CD OAR: Pressing (1/2hr*$0.88) = $0.44 Packing (1/4hr*$1.36) = $0.34 $0.78 9

10 Absorption Costing OAR * actual activity Under/Over Absorption Actual overhead expenditure Amount of overhead absorbed Under/Over absorption $ X (X) X/(X) Reasons for under/over absorption: Expenditure variance Actual overhead expenditure differed from budgeted overhead expenditure. Volume variance Actual production activity differed from expected (normal) activity level. 10

11 Marginal Costing (a) A principle whereby variable production costs only are charged to cost units and the fixed costs attributable to the relevant period are written off in full against the contribution for the period. (b) Inventory is valued at variable cost of production. Contribution (a) Selling price per unit - all variable costs per unit (b) Fixed costs + profit Profit = (sales - VC) - FC = contribution - FC So, contribution = FC + profit 11

12 Absorption Costing vs. Marginal Costing Selling price per unit $10 Variable costs per unit direct materials $2 direct labour $3 production overhead $1 selling and distribution $1 Fixed costs: production: budgeted $8,000 actual $8,500 selling and distribution (budgeted & actual): $2,000 Activity levels: Year 1 Year 2 12 units units Budgeted production 4,000 4,000 Actual sales 4,200 4,000 Actual production 4,400 3,800 There is no opening inventory in Year 1. each year Required: prepare an income statement under absorption/marginal costing for years 1&2 $6

13 Absorption Costing vs. Marginal Costing Year 1 Year 2 $ $ $ $ Sales 4,200*$10 42,000 40,000 Less: Cost of sales: opening inventory - 1,600 production: variable costs $6*4,400 26,400 22,800 $6*3,800 fixed costs (absorbed) 8,800 7,600 less: closing inventory (1,600) - (over)/under absorption (300) (33,300) 900 (32,900) Gross profit 8,700 7,100 Variable selling & distribution Fixed selling & distribution 4,200 $1*4,200 4,000 $1*4,000 2,000 (6,200) 2,000 (6,000) Net profit 2,500 1,100 13

14 Absorption Costing vs. Marginal Costing Op + purchase + production C.O.S = Cl OAR = $8,000/4,000=$2/unit Actual overhead expenditure 8,500 Amount of overhead absorbed ($2*4,400) 8,800 Over absorption (300) Actual overhead expenditure 8,500 Amount of overhead absorbed ($2*3,800) 7,600 Over absorption

15 Absorption Costing vs. Marginal Costing Year 1 Year 2 $ $ $ $ Sales 42,000 40,000 Less: Cost of sales: opening inventory - 1,200 variable 26,400 22,800 production costs less: closing inventory (1,200) $6*200 - Variable selling & distribution 4,200 (29,400) 4,000 (28,000) Contribution 12,600 12,000 Fixed costs: production 8,500 8,500 selling & distribution 2,000 (10,500) 2,000 (10,500) Profit 2,100 1, Accaspace, 中国 ACCA 特许公认会计师教育平台 Copyright ACCAspace.com

16 Absorption Costing vs. Marginal Costing Effect of inventory valuation on profit (a) Production = sales ( inventory is constant ) AC profit = MC profit (b) Production < sales ( inventory is falling ) AC profit < MC profit (c) Profit > sales ( inventory is climbing ) AC profit > MC profit If inventory AC profit is higher If inventory AC profit is lower 16 Accaspace, 中国 ACCA 特许公认会计师教育平台 Copyright ACCAspace.com

17 Absorption Costing vs. Marginal Costing If there is a difference between the two profit figures, the difference between the figures will effectively be the OAR * movement in inventory Example: Movement in inventory of Year 1 : Inventory, so AC is lager The difference = $2/unit * 200 units = $400 17

18 ACCAspace Provided by ACCA Research Institute

ACCAspace ACCA F5. Provided by ACCA Research Institute. Performance Management (PM) 业绩管理 ACCA Lecturer: Kimberley Gong. ACCAspace 中国 ACCA 特许公认会计师教育平台

ACCAspace ACCA F5. Provided by ACCA Research Institute. Performance Management (PM) 业绩管理 ACCA Lecturer: Kimberley Gong. ACCAspace 中国 ACCA 特许公认会计师教育平台 ACCAspace Provided by ACCA Research Institute ACCA F5 Performance Management (PM) 业绩管理 ACCA Lecturer: Kimberley Gong ACCAspace 中国 ACCA 特许公认会计师教育平台 Copyright ACCAspace.com Content of chapter 7 1 2 What