Acct 301 Homework Week 8
This week’s chapter readings have been based on internal reporting methods that measure and present inventories and incomes known as variable costing. For accurate results for internal reporting, certain techniques are applied to enable sufficiently logical decisions. Absorption costing or full costing is one such technique used by non-accounting managers in external reporting. Absorption costing is considered a normal manufacturing cost incurred during the manufacturing process and is related to product cost included in the inventory. Furthermore, sales are reduced by the cost of sales, which include the cost of inventory. The cost of inventory includes direct materials, direct labor, and manufacturing overheads for inventory. Absorption costing is a reliable measure of allocating costs to the products they relate to. The organization will be able to set prices for their products based on how each product absorbed costs. Moreover, absorption costing systems will predominantly be applicable in setting strategic decisions such as material and labor outsourcing. However, absorption costing fails in various areas, and variable costing is used to address these deficiencies. Variable costing assigns production costs to inventory and cost of goods sold. A certain product incurs not all cost, certain products are absorbed higher than others. Absorption costing allocates all products to that specific cost while under variable costing, only the percentage incurred by that product is allocated. The two methods always differ in various ways in the section of the cost of goods subtracted from sales.
Chapter 24 was based on characteristics and decision-making ramifications. Managers do make mistakes in their daily activities. Earlier chapters focused on various ways of addressing, monitoring, and reducing wastage. This chapter equips managers with knowledge in regards to making sound principles and judgments. These timely decisions assist managers in eliminating errors and business prosperity. The chapter identifies sunk costs and relevant costs. Sunk costs are cost that has already been incurred after a bad decision and should not be used while making decisions; instead, we should focus on relevant cost. Relevant cost identifies the best decisions that have benefits since it relates to relevant costs and benefits. Additionally, managers are liable for the decisions they implement based on best practices. Managers are torn between outsourcing and producing specific orders. They analyze the benefits of outsourcing a product from external manufacturers and weigh. Sometimes outsourcing is more beneficial than producing.
- Why income statements would results prepared and reported externally, following GAAP absorption costing, differ from income reported internally, in a variable/fixed contribution margin format?
Sometimes managers are reluctant to share information with external parties like competitors. Internal reporting requires reporting of a segment that is used by top managers. The segments are further subdivided into sub-segments used by middle managers. This information is only meant to be used internally. However, external segment reporting will differ from internal reporting since only external parties’ information is included under GAAP guidelines.
- What analysis tools are available to help management analyze large, capital investment options decisions?
Tools available for managers in analyzing capital investment options decisions include net present value, accounting rate of return, internal rate of return, and payback period.
- What topic(s) gave you trouble this week (if any)? /What topic(s) do you feel you were able to grasp? Post questions in the homework discussion thread!
Although these week chapters were easier to grasp, several factors presented a challenge. Being a non-accounting manager, tools for capital investment options were a little bit technical to me. Additionally, the question posed is, why would companies prepare two reports for internal and external parties?