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Jenya_CPA2B
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Posted: 01 Apr 2011 at 14:00 \| IP Logged

Hi All,

In the BEC 5 Becker lecture Peter Olinto gave the following notes:

Variable costs for the variable approach consit of DM+DL+Var manufacturing OH+ Var SG&A, which make up the inventory costs.

Now, when I'm doing the questions for this part of the chapter (#03716) I have a problem with understanding the answer for the following question:

Using the variable costing method, which of the following costs are assigned to inventory:

Variable SG&A Variable factory OH

a. YES YES

b. YES NO

c. NO NO

d. NO YES

Why is the correct answer D? Pls help.

Any thoughts will be appreciated.

Thanks.

murdock
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Posted: 03 Apr 2011 at 21:59 \| IP Logged

Hey Jenya,

It's interesting you ask this question because I just
encountered it myself in the Wiley book (Mod 48, question
17).

I too was a little confused. The explanation here is
that variable selling and administrative costs are
treated as period costs and thus not assigned to
inventory.

I did not see this explained anywhere in the book I have
so I assume it's one of those exceptions we have to learn
along the way.

Hope this helps

MS_SAS413
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Posted: 03 Apr 2011 at 22:40 \| IP Logged

I was initially confused about this question also but I understand
now.

When it says inventory costs that means product cost. Meaning that
when a product is sold that portion of costs will add to the cost of
the product. However SGA costs don't attach to products they are
automatically expensed.

Var. SGA IS a variable cost however its not a product cost under
direct or absorption. It won't add to the cost of your product. Just
think of it like this: if u were buying a car, you wouldn't want the
dealership adding to the price of ur car the office supplies or coffee
they serve to customers. However you would expect the cost of
shipping the car to them to get to you (VMOH) to be charged to you.

Hope that helps! Good Luck

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Jenya_CPA2B
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Posted: 04 Apr 2011 at 22:29 \| IP Logged

Thanks guys.

But I still don't get it :( Ok, it's a product cost, but isn't it different for variable and absorbtion methods? Variable isn't GAAP, right? That's probably why I have a problem with understanding this concept...

MS_SAS413
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Posted: 04 Apr 2011 at 23:17 \| IP Logged

It took me forever to understand variable costing so don't feel bad.

SGA under Variable and Absorption are treated the same way. They are not product costs under either method.

Under Direct/Variable the formula looks like this:

Sales
- ALL VARIABLE COSTS (DM, DL, VMOH,Var SGA)
= Contribution Margin.

-Fixed Cost (FMOH, and Fixed SGA) (SGA does not attach to product)
= Net Income.
________________________
Now don't get confused by "All variable costs" Yes technically all Variable costs are subtracted to get contribution margin, BUT VARIABLE SGA IS NOT A PRODUCT COST.

Variable isn't GAAP due to the treatment of Fixed Manufacturing O/H.

So for instance with Absorption (GAAP) you would add the FMOH as part of your product costs. That cost would only become relevant when the product is SOLD.

Under Variable your subtracting FMOH immediately. So as soon as its identified as a fixed cost your subtracting it, no matter if its sold or not.

(Absorption)(GAAP)

Sales
-COGS (DM, DL, VMOH, FMOH (see FMOH its a product cost)
-Variable SGA
-Fixed SGA
=Net Income

Period Expenses under both.

So basically SGA is never a product expense under either method. The difference is going to be your treatment of FMOH.

Hope that helped!

__________________
BEC 69,64,70,75!!
REG 63,87
FAR-75
Aud-86
You fail when you don't get back up and try again!
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