Contabilidad de Costes I
External and internal reporting
In order to provide external information and for comparison between companies is very important to adopt a requirement, in terms of valuation methods.
Overhead costs related to production, which a company incurs during the course, must been included.
In the UK issued a rule requiring the external reporting underAbsorption cost method. However, Variable costing is used for internal management only. Will be decided by the management of the company, what method is suitable in order to provide information more meaningful.
Variable costing: Method in which the costs to be inventoried include only the variable manufacturing costs. Fixed factory overhead is treated as a period cost-it is deducted along with theselling and administrative expenses in the period incurred.
Absorption costing: The cost to be inventoried includes all manufacturing costs, both variable and fixed. Nonmanufacturing (operating) expenses, i.e., selling and administrative expenses, are treated as period expenses and thus are charged against the current revenue.
Variable costing and absorption costing: a comparison of their impacton profit
A comparison between Absorption and Variable costing follows:
Absorption Costing | Variable Costing |
1. Required for outside reporting | 1. Not accepted for outside reporting |
2. Includes fixed overheads as an inventoriable cost | 2. Does not include fixed overheads as an inventoriable cost |
3. Stresses gross profit | 3. Stresses contribution margin |
4. Has a higher netincome when production exceeds sales | 4. Has a higher net income when sales exceeds production |
Effects of the two costing methods on net income:
* PRODUCTION EQUALS SALES: Net income will be the same under both methods.
* PRODUCTION EXCEEDS SALES: A larger net income will be reported under Absorption costing.
* SALES EXCEED PRODUCTION. A larger net income will be reported underVariable costing
* IMPACT OF SALES FLUCTUATIONS. With Variable costing, profit is a function of sales volume only, that is, when sales volume increases profit also increases and vice versa. But with Absorption costing, profit is a function of both sales volume and production volume, that is, when sales volume increases profit decreases.
Some arguments in support of variable costing
The fact toseparate fixed and variable costs, help in order to make a decision. When inventory levels can fluctuate considerably, profits could be deformed if are calculated by Absorption method. Variable costing overheads to avoid stocks.
Some arguments in support of absorption costing
This method not only not minimize importance of fixed costs, but these costs budget will be deferred and included in thevaluation stock at closing, and shall be registered as a cost only when they are sold. Proponents of this method argue that production costs should be charged to the produced unit and included in the valuation stock.
Current cost accounting
Discussion between two methods applies when stocks are valued with historical cost. If external report gives up these methods in favor of the analyticalaccounts, discussion becomes more intense as sales cost shall be calculated using the currents cost, nor historical cost. Even if stock are still valued on a historical cost basis in external accounts, these are strong arguments for adopting current cost estimates for the internal report.
| QUARTER 1 | QUARTER 2 | QUARTER 3 | QUARTER 4 |
SALES | 4.000.000,00 | 4.500.000,00| 4.500.000,00 | 4.500.000,00 |
- Direct Industrial Cost | 2.720.000,00 | 3.060.000,00 | 3.060.000,00 | 3.060.000,00 |
Direct materials | 928.000,00 | 1.044.000,00 | 1.044.000,00 | 1.044.000,00 |
Direct labour | 1.040.000,00 | 1.170.000,00 | 1.170.000,00 | 1.170.000,00 |
Variable Manufacturing Costs | 272.000,00 | 306.000,00 | 306.000,00 |...