رد: N:05-Unit 3.6 : ESSAY QUESTION
إجابة السؤال الحادي عشر
Absorption costing could result in an increase in net income if a company increases its production and its inventory. This occurs because fixed manufacturing overhead is allocated to more production units—some of which will be reported as inventory.
To illustrate, let’s assume that a company has no beginning inventory and it has production plans for 100,000 units. Let’s also assume that its annual fixed manufacturing overhead is $600,000. If 100,000 units are produced, the fixed manufacturing cost per unit will be $6 ($600,000 divided by 100,000 units). If the 100,000 units are sold for $20 each, the income statement will report sales revenues of $2,000,000 and its cost of goods sold will include $600,000 of fixed manufacturing overhead.
Now let’s assume that the company decides to produce 120,000 units even though sales are expected to remain at 100,000 units. Because the fixed manufacturing overhead remains at $600,000 the cost per unit for fixed manufacturing overhead will be $5 ($600,000 divided by 120,000 units produced). In this case the company will report the same sales revenues of $2,000,000 (100,000 units sold times $20) but its cost of goods sold will include only $500,000 of fixed manufacturing overhead (100,000 units sold times $5). The company’s balance sheet account Inventory will include $100,000 (20,000 units times $5) of the company’s fixed manufacturing overhead.
As was illustrated above, the income statement will report a lower cost of goods sold when production and inventory increased. A smaller cost of goods sold will mean more gross profit and more net income
إجابة السؤال الثاني عشر
This phrase is used in cost accounting and involves the assigning, applying, or allocating of fixed manufacturing overhead costs to the units produced by a manufacturer.
Three examples of fixed manufacturing overhead costs include
1) Depreciation of the manufacturing equipment
2) The property tax on the factory building
3) The salaries of the factory supervisors
Each of these costs comes in large dollar amounts (they do not occur at a rate of say $1.00 per unit) and none is directly traceable to the products manufactured. The dollar amount of each of these costs will probably not change if the company produces 10% more units or 10% fewer units.
Because the fixed manufacturing overhead costs are indirect product costs (not directly traceable to the products) the accountant allocates (or assigns or applies) these costs to the products on some basis—perhaps on the basis of machine hours or through activity-based costing. While the accountant assigns or allocates these costs, the products are said to be absorbing these fixed manufacturing costs. (Absorption costing, which is required for external financial statements, means that each product’s cost includes direct materials, direct labor, variable manufacturing overhead, and fixed manufacturing overhead.)
Fixed manufacturing overhead cost is usually applied to the products (and is absorbed by the products) through the use of a predetermined annual overhead rate that is based on some planned volume of production. If the actual product volume is less than the planned volume (and the costs are as planned) the fixed manufacturing overhead will be “under-absorbed.” When the actual volume exceeds the planned volume and the costs are as planned, the fixed manufacturing overhead will be “over-absorbed.”
إجابة السؤال الثالث عشر
Overabsorbed is usually used in the context of a manufacturer’s production overhead costs. Since manufacturing overhead costs are not directly traceable to products, they need to be allocated, assigned, or applied to the products through an overhead rate. We also state that the products absorb the overhead costs through the overhead rate.
The overhead rate is normally a predetermined rate—meaning that it was calculated prior to the start of the accounting year by using
1) The expected amount of overhead costs
2) The expected volume of production
Because of these two estimates, it is unlikely that the amount of overhead allocated, applied, assigned, or absorbed will be equal to the actual overhead costs incurred.
If the actual products manufactured are assigned or absorb more overhead through the overhead rate than the actual amount of overhead costs incurred, the products have overabsorbed the overhead costs.
At the end of the accounting year, the amount of the overapplied, overassigned, or overabsorbed overhead is often credited to the cost of goods sold. The reasons are
1) The overabsorbed amount is not significant
2) Most of the products absorbing too much overhead costs have been sold
If the overabsorbed amount is significant, then the amount overabsorbed must be prorated or allocated as a reduction to the cost of the inventories and to the cost of goods sold based on where the overabsorbed overhead costs are residing at the end of the accounting year.
إجابة السؤال الرابع عشر
In cost accounting, manufacturing overhead costs are often assigned to products by using a predetermined overhead rate. The predetermined rate is likely based on an annual manufacturing overhead budget divided by some activity such as the expected number of machine hours. Instead of saying that the manufacturing overhead is assigned, we might say it is allocated, applied or apportioned to the products manufactured during the period. We could also say that the products have absorbed the overhead.
If the amount of overhead assigned to the products manufactured is greater than the amount of overhead actually incurred, the products have overabsorbed the overhead costs. If the amount of overhead assigned to the products is less than the amount of overhead actually incurred, the products have underabsorbed the overhead costs.
The cause of the overabsorption or underabsorption will be some combination of
1) The quantity of products manufactured
2) The actual overhead costs incurred.
The amounts of the overabsorbed and underabsorbed manufacturing overhead are referred to as variances.
إجابة السؤال الخامس عشر
Financial accounting has its focus on the financial statements which are distributed to stockholders, lenders, financial analysts, and others outside of the company. Courses in financial accounting cover the generally accepted accounting principles which must be followed when reporting the results of a corporation’s past transactions on its balance sheet, income statement, statement of cash flows, and statement of changes in stockholders’ equity.
Managerial accounting has its focus on providing information within the company so that its management can operate the company more effectively. Managerial accounting and cost accounting also provide instructions on computing the cost of products at a manufacturing enterprise. These costs will then be used in the external financial statements. In addition to cost systems for manufacturers, courses in managerial accounting will include topics such as cost behavior, break-even point, profit planning, operational budgeting, capital budgeting, relevant costs for decision making, activity based costing, and standard costing.
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