NAME : Abu Zafour
Fathers Name : M. Fazlur Rahman
Mothers Name : Mrs. Kohinur Begum
Date of Birth : 1st January, 1988
Nationality : Bangladeshi by birth
Birth Place : Bauphal, Patuakhali
Marital Status : Single
Religion : Islam (Sunni)
Weight : 60 Kg.
Height : 5’ 4”
Health : Fit
Impact of (just in time) JIT
Impact of JIT Inventory Methods
When companies use JIT methods for controlling their operations,
the distortions of income that can occur under absorption costing largely (or
completely) disappear.
1. The cause of distortions in net operating
income
Erratic movements in net operating income
under absorption costing and the differences in net operating income between
absorption and variable costing can be traced to changing levels of inventory.
When inventory levels are constant or negligible, absorption costing and
variable costing methods yield the essentially same net operating income.
2. The JIT solution
Under an ideally functioning JIT system, goods
are produced strictly to customers’ orders. Finished goods inventories almost
disappear and work in process inventories are kept to a minimum. With little or
no inventories, fixed manufacturing overhead costs cannot be shifted between
periods under absorption costing. As a result, both variable and absorption
costing will show essentially the same net operating income figure, and the net
operating income under absorption costing will move in the same direction as
movements in sales.
Absorption Costing (External reporting) and
Income Taxes
Absorption costing is required for external reporting for a
company. A company that attempts to use variable costing on its external
financial reports runs the risk that its auditors may not accept the financial
statements as conforming to generally accepted accounting principles (GAAP).
Tax law on this issue is cleat cut. A company must use absorption costing for
its external reports; a manager can also use variable costing income statements
for internal reports. No particular accounting problems are created by using
both costing methods- the variable costing method for internal reports and the
absorption costing method for external reports. Top executives are typically
evaluated based on the earnings reported to shareholders on the company’s
external financial reports.
Format Differences Under Two Methods
Format
(Technical) Differences
Absorption costing makes a primary classification of costs according
to manufacturing and nonmanufacturing functions, emphasizing the gross margin
(that is, Sales COGS) available to cover all fixed and variable selling and
administrative expenses.
Direct costing makes a primary classification of costs into
variable and fixed categories, emphasizing the contribution margin (that is,
sales ? variable costs) available to cover all fixed costs.
Report Formats
The formats for profit reporting under direct costing and
absorption costing are different.
Absorption Costing
Revenues ………………………… ***
Less cost of goods sold
…………..
***
Gross margin ………………..……
***
Less selling and
administration expenses:
Variable ……………………….. ***
Fixed …………………………... ***
Net operating income
(NOI) ***
Variable Costing
Revenues ………………………… ***
Less variable cost:
Manufacturing cost
…………..…..
***
Selling and
administration cost ….. ***
Contribution margin (CM)
....….… ***
Less fixed costs:
Manufacturing costs ………….. ***
Selling and administration costs.. ***
Net operating income
(NOI) ***
The figures under the two approaches will not always be the same.
Interpretation
of the Difference