Project – Essay Example

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Managerial Accounting (Acct116) al Affiliation Bike cost and selling price Absorption costing 2013 2014 Direct material $ 50 $ 50 Labor $ 30 $ 30 Overhead cost $80,000/3,000= $26.7 $80,000/1,500 = $ 53.3 Total product cost $ 106.7 $ 133.3 Selling price $ 106.7*120 % = $ 128.04 $ 133.3*120% = $ 159.96. Variable costing 2013 2014 Direct material $ 50 $ 50 Labor $ 30 $ 30 Total product cost $ 80 $ 80 Selling price $ 80*120 % = $ 96 $ 80*120% = $ 96. 2 Under absorption costing, all the direct costs and indirect costs that are associated with a particular product are used in determining its cost base. Therefore, the final cost of a product will consist of both the fixed and variable costs (Fong & Kumar, 2002). Variable costing considers only the direct costs in determining its cost base. 3.

Both methods will produce differing figures of operating income. The difference is explained by the different ways in which the fixed costs of the organization are treated under the two methods of costing (Fong & Kumar, 2002). It is important to note that the net income from absorption costing is higher as compared to that from variable costing. This is attributed to the fixed overheads that are part of the closing inventory when using the absorption method of costing.

Such inventory absorbs a portion of fixed overheads which reduces the current period burden. This means that a part of the current fixed costs are transferred to the following period. When using the variable method of costing, fixed costs of manufacturing are not included in cost of the product. The costs are fully charged in the income and expenses of the current period. This therefore means that the ending inventory does not absorb any portion of the fixed costs (Harris, 2000). Absorption costing 2013 2014 Direct material $ 50* 2500 = 125,000 $ 50*2,000 =100,000 Labor $ 30* 2500 = 75,000 $ 30*2,000 = 60,000 Overhead cost $80,000/3,000= $26.7* 2500 = 66,750 $80,000/1,500 = $ 53.3*2,000 = 106,600 Total product cost $ 106.7* 2500 = 266,750 $ 133.3*2,000 =266,600 Total Sales $ 106.7*120 % = $ 128.04* 2500 = $ 320,100 $ 133.3*120% = $ 159.96.

*2,000 = $ 319,920 Operating Income ($320,100-266,750)=$ 53,350 ($ 319,920-266,600)=$ 53,320 Variable costing 2013 2014 Direct material $ 50* 2500 = 125,000 $ 50*2,000 =100,000 Labor $ 30* 2500 = 75,000 $ 30*2,000 = 60,000 Total product cost $ 80*2,500 = 200,000 $ 80*2,000 =160,000 Total Sales $ 80*120 % = $ 96*2,500 = $ 240,000 $ 80*120% = $ 96 *2,000 = $ 192,000 Operating Income (240,000-200,000) =$ 40,000 (192,000-160,000) = $32,000 4 Reconciliation statements 2013 2014 Net income from variable method of costing $ 40,000 $32,000 Fixed deferred overhead costs $ 26.7* 500= $ 13,350 $53.3*500=$ 26,650 Net income under the absorption costing method = $ 53,350.

$ 53,320 (Lal & Srivastava, 2009). 5 For 500 bikes Under absorption costing, total income for the organization will be 2013 2014 Sales $ 128.04* 500=$ 64,020 $159.96*500 = $ 79,980 Costs $ 106.7* 500 = $ 53,350 $ 133.3 *500 = $ 66,650 Income =$ 10,670 =$ 13,350 From the above calculations, it is evident that the organization will make profits. 6.

The best advice would be to incorporate both methods of costing in the operations of the company. Absorption costing should be used in reporting the income of the company to its stakeholders while variable costing methods should be used pricing (Harris, 2000). This is due to the fact that including fixed and variable costs in pricing can easily lead to making improper decisions. References Fong, S.

C. C., & Kumar, N. K. (2002). Cost accounting. Hong Kong: Hong Kong Association of Accounting Technicians. Harris, J. K. (2000). Cost accounting. Upper Saddle River (N. J.: Prentice Hall. Lal, J., & Srivastava, S. (2009). Cost accounting. New Delhi: Tata McGraw-Hill.

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