Refer to Part 1: http://psu.duytan.edu.vn/Details/ArInstructorDetail/75/1

From previous section, I gave you a problem about variable costing and absorption costing report. In this part, I present solution and give some advice for manager to make decision.

Solution:

We don't agree with management's decision and conclusions.

First, we prepare the income statement under variable costing methods:

Cake shop

Income statement - Variable costing

For the year ended December 31,2012

From the income statement above, you will see the fixed manufacturing costs and fixed selling and administrative is incurred even if eliminate the Diet cake line.

Total income from operation of three product before and after eliminating are:

- before:6,000=16,000 +28,000 - 38,000

- after: -4,000 = 16,000 + 28,000 - 24,000 - 24,000

Thus, manager's conclusion - the profits of the company to increase by $38,000- is wrong.In this case, if shop continues produce Diet cake line the result of total income from operation is better than eliminated this line production.

Controllable costs are costs that can be influenced by management at that level. For example, plant supervisors control the use of direct materials in their departments.  Noncontrollable costs are costs that another level of management controls. Plant supervisors  have no control, though, over insurance costs related to the property, plant, and equipment.

Variable manufacturing costs are controlled by operating management. In contrast, fixed manufacturing overhead costs such as the salaries of production supervisors are normally controlled at a higher level of management. Likewise, control of the variable and fixed operating expenses usually involves different levels of management. Since fixed costs and expenses are reported separately under variable costing, variable costing reports are normally more useful than absorption costing reports for controlling costs.

MBA Võ Thị Thùy Linh

Reference:

Chapter 19: Cost behavior and Cost-Volume-Profit analysis, Financial and Managerial Accounting, 10e,  Warren & Reeve & Duchac

Chapter 20: Variable Costing  for Management Analysis, Financial and Managerial Accounting, 10e,  Warren & Reeve & Duchac

http://blog.accountingcoach.com

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