Vocabulary
Absorption Costing
Assumes that products absorb all costs incurred to produce them.
Variable costing includes:
1) Direct Materials
2) Direct Labor
3) Variable Overhead
Variable Costing
costs that change in production level are included in product costs.
Absorption Costing includes:
3) BOTH Variable and Fixed Overhead
Contribution Margin Ratio
% of sales that remain after subtracting variable expenses.
(Formula) Income under Absorption costing=
Income under variable costing + Fixed overhead cost in ending inventory - Fixed overhead cost in beginning inventory
Planning Production (Type 1)
1) Producing too much Inventory
2) Excess Inventory
3) Higher storage and financing costs
equals Greater risk of obsolescence
Contribution Margin by Production Line (3)
1) Increasing selling price per unit
2) Decreasing variable cost of goods sold per unit
3) Increasing sales efforts
Planning Production (Type 2)
1) Producing too little Inventory
2) Lost sales
equals Customer dissatisfaction
Setting Target Price (3 step)
1) Determine the product cost per unit using absorption costing.
2) Determine the target markup on product cost per unit.
3) Add the target markup to the product cost to find the target selling price.