Absorption Costing

Absorpton Costng – assigns all manufacuring coss o he produc. F ixed OH is reaed as produc cos Variable Variable Costng – assigns only variable manufacuring coss o he producs. mporan managerial ool for inernal applicaton

!roduc  Coss !eriod Coss

Absorpton Costng "# "$ VOH FOH %&' 'xpenses

!rodu !roducto cton n ( %ales %ales !rodu !roducto cton n ) %ales %ales !rodu !roducto cton n * %ales %ales

Variable Costng "# "$ VOH FOH %&' 'xpenses

Absorp Absorpton ton ncome ncome ( Vari Variabl able e nco ncome me Absorp Absorpton ton ncome ncome ) Vari Variabl able e nco ncome me Absorp Absorpton ton ncome ncome * Vari Variabl able e nco ncome me

%egmen – subuni of a company of su+cien imporance o ,arran he producton of performance repors "irec Fixed 'xpenses – -xed expenses direcly raceable o he segmen Common Fixed 'xpenses – -xed expenses no direcly raceable o he segmen %egmen #argin – pro- conributon each se gmen maes o,ard covering a -rm/s -rm/s common -xed expenses Ordering Coss – coss of placing and receiving an order Carrying Coss – coss of eeping and soring invenory invenory %ocou Coss – coss of no having a produc available ,hen demanded by a cusomer 'conomic Order 0uanty – number of unis in he optmal si1e order 2uanty ha minimi1es he oal cos 3eorder !oin – poin in tme ,hen a ne, order should be placed $ead 4ime – tme re2uired o receive he economic order 2uanty once an order is placed or a seup is sared %afey %oc – exra invenory carried o serve as insurance agains changes in demand 5us6n64ime 5us6n64ime Approach – mainains ha goods should be pulled hrough he sysem by presen demand raher han being pushed hrough on a sc hedule based on antcipaed demand

Total Inventory Inventory Related Related Cost =Ordering Ordering Cost + Carrying Carrying Cost  OrderingCost =¿ of order orderss per year year × Cost Cost of Plac Placing ing an Order Order

 Average  Average Number of Units ∈ Inventory  Inventory =

Units ∈Order 2

CarryingCost = Average  Average ¿ of Units ∈ Inventory  Inventory × Cost of Carrying OneUnit  One Unit  ∈ Inventory  Inventory  Average  Average Inventory =

( Maximum Amount − Minimum Amount ) 2

 Reorder Point = Rate of Usage × ead Time !afety !afety !toc"  !toc" = ( Maximum  Maximum #aily Usage− Average  Average #aily Usage ) × ead ead Time ime

CO =Cost of placing one order  $conomic Order %uantity =

√

2 ×CO×

# CC 

 #= #emand CC =Carrying cost of oneunit 

7udge – -nancial plans for he fuure and a ey componen of planning %raegic !lan – plos directon for an organi1aton/s fuure actvites and operatons !lanning – looing ahead o see ,ha actons should be aen o reali1e partcular goals Conrol – comparing acual resuls ,ih budgeed resuls #aser 7udge – comprehensive -nancial plan for he organi1aton as a ,hole Contnuous 7udge – moving 896monh budge 7udge Commi:ee – revie,s he budge; provides policy guidelines and budgeary goals 7udge "irecor – he person responsible for directng and coordinatng he organi1aton/s overall budgetng process Operatng 7udge – describes he income6generatng actvites of a -rm Financial 7udge – deails he inoods nvenory 7udge 6 cos of unsold unis is compued on he ending -nished goods invenory budge CO>% 7udge – reveals he expeced CO>% Cash 7udge 6 deailed plan sho,ing ho, cash resources ,ill be ac2uired and used 7udgeed 7% >oal Congruence – alignmen of managerial and organi1atonal goals "ysfunctonal 7ehavior – individual behavior ha is in he basic con
#oneary ncentves onmoneary ncentves

!artcipatve 7udgetng – allo,s subordinae managers considerable say in ho, he budges are esablished 7udgeary %lac – exiss ,hen a manager deliberaely underestmaes revenue or overestmatng coss !seudopartcipaton – op managemen assumes oal conrol of he budgetng process; seeing only super-cial partcipaton from lo,er level managers Conrollable Coss – coss ,hose level a manager can in
#yopic 7ehavior – occurs ,hen a manager aes acton ha improve budgeary performance in he shor run bu bring long erm harm o he -rm

Units ¿ be Produced = $xpected Unit !ales + #esired $I Units− &I Units  Purc'ases= #M needed + #M ∈ #esired $I − #M ∈ &I  Cas' Available = &eginningCas' &alance + $xpected Cas' Receipts  $ndingCas'&alance=Cas' Available− $xpected Cas' #isbursements