Midterm 2 Study Guide Below is a list of some of the things you should definitely be familiar with for Midterm 2. It is not intended to be a complete list. Rather, this should be used a supplement to the studying you were otherwise doing. Chapter 7 Under variable costing, only those manufacturing costs that vary with production quantity (output) are included as product costs. This would typically include direct materials, direct labor, and the variable portion of manufacturing overhead (V-MOH). Unlike in absorption costing (i.e., everything we did in Midterm 1), fixed manufacturing overhead (F-MOH) is treated as a period expense that goes straight to the income statement rather than flow into WIP, FG, and COGS. You should have a very clear understanding of the differences in these costing systems. You should be able to do the following: separate total manufacturing cost into it's V-MOH and F-MOH components (recall: y = a + bx). We did this on the last midterm too. calculate unit costs under both variable and absorption costing prepare a contribution margin income statement under variable costing and a regular income statement using absorption costing o Remember, under variable costing we have all variable costs (inventory related and variable S&A expense) "above the line" and both fixed S&A expense as well as fixed inventory costs "below the line." The “line” is the contribution margin. o Total sales (revenue) will be the same in both income statements o NET INCOME MAY NOT BE THE SAME UNDER VARIABLE AND ABSORPTION COSTING If production > sales: inventories increase and absorption costing net income is higher If production = sales: inventory levels stay the same and both net income figures are the same If production < sales: inventories decrease and variable costing net income is higher Reconcile absorption costing net income to that under variable costing (the difference is the difference in unit prices multiplied by the difference in
Ed deHaan 2009
University of Washington – ACCT 225 – Intro Managerial Accounting
production over sales; this difference is stored in the inventory account under absorption costing) Explain the advantages of variable costing over absorption costing. Why, then, do we use absorption costing for external reporting (under GAAP)?
Chapter 9 Terms to know: - master budget - planning & control - responsibility accounting - continuous or perpetual budget A “master budget” consists of a set of sub-budgets for each core function of the company. Preparation of the master budget starts with estimating sales and ends with a full budgeted balance sheet and income statement. Once you have budgeted sales, you can use other assumptions and data to figure out everything else you need to know. The key thing to keep in mind is that cash in/outflows to not necessarily occur at the same time as the related purchase, sale or expense. Each budget is essentially a three-step process. First, you figure out what quantities are involved. Then you figure out how much cash is involved. Lastly, you figure out when the related cash will be paid or received. 1) Sales Budget – predicts how many units you think you’ll sell and then calculates the expected revenue from those sales (quantity x price). Revenues are partially collected in the month of sale and partially in future months. For example, a company may collect 50% of revenues in the month of the sale (month “t”), 35% in the following month (month “t + 1”), and 15% in the next month (month “t + 2”). With this information, you can figure out how much cash you expect to collect each month. In turn, you can then figure out your expected ending Accounts Receivable balance for each month. 2) Production Budget – shows you how many units of inventory you’ll need to produce in order to accommodate your Sales Budget. At the end of each month, you also need to make sure you have sufficient...