Alternative inventory costing methods for decision making. Fixed and variable costs are determinant in a company’s profitability, where fixed costs impact net income. Some companies focus on the variable costs and its role in profitability. Alternative inventory costing methods (AICM) includes:
Previously variable and fixed manufacturing costs were classified as product costs.
job order costing = costs of direct materials, direct labor and both variable and fixed manufacturing overhead
Full absorption costing is all manufacturing costs are charged to or absorbed by the product.
Example company cost data
cost_data = {
'selling_price': 20,
'units_produced': 30e3,
'units_sold': 20e3,
'begin_inventory': 0,
'variable_costs': {
'manufacturing': 9,
'direct_materials':5,
'direct_labor': 3,
'var_overhead': 1
},
'selling_admin_costs': 2,
'fixed_costs': {
'manuf_overhead': 120e3,
'selling_admin_expenses': 15e3
}
}per unit manufacturing cost using each costing approach
def absorption_costing_compare(cost_data: dict):
# absorption costing
fixed_manuf_overhead = cost_data['fixed_costs']['manuf_overhead'] / cost_data['units_produced']
abs_cost = sum( list( cost_data['variable_costs'].values() )[1:] ) + fixed_manuf_overhead
var_cost = sum( list( cost_data['variable_costs'].values() )[1:] )
diff = abs_cost - var_cost
print(" - Absorption vs Variable costing -")
print("Absorption costing : manufacturing cost per unit ..... ${:,}".format(abs_cost))
print("Variable costing : manufacturing cost per unit ..... ${:,}".format(var_cost))
print("\n difference in manufacturing cost per unit is $", diff)
#----------- income statements
sales = cost_data['units_sold'] * cost_data['selling_price']
cogsm = cost_data['units_produced'] * abs_cost
# 10,0000
end_inventory = (sales - cogsm) * abs_cost
cog_sold = cost_data['units_sold'] * abs_cost
gross_profit = sales - cog_sold
var_admin_expense = (sales - cogsm) * diff
fixed_admin_expense = cost_data['fixed_costs']['selling_admin_expenses']
net_income = gross_profit - var_admin_expense - fixed_admin_expense
print("\n === Income Statement ===")
print("Absorption cost\n Cost of Goods Sold")
print(" Sales ..... ${:,}".format(sales))
print(" Cost of goods manufactured ............ ${:,}".format(cogsm))
print(" end of inventory ...................... ${:,}".format(end_inventory))
print(" cost of goods sold .................... ${:,}".format(cog_sold))
print(" gross profit .......................... ${:,}".format(gross_profit))
print(" variable selling & admin expenses ..... ${:,}".format(var_admin_expense))
print(" fixed selling & admin expenses ........ ${:,}".format(fixed_admin_expense))
print(" Net income ........................................... ${:,}".format(net_income))
#---- var costing
var_sales = cost_data['units_sold'] * cost_data['selling_price']
var_manuf_costs = cost_data['units_produced'] * var_cost
end_inventory = (sales - cogsm) * var_cost
var_cog_sold = var_manuf_costs - end_inventory
var_sell_admin_expense = cost_data['units_sold'] * cost_data['selling_admin_costs']
contrib_margin = var_sales - (var_cog_sold + var_sell_admin_expense )
var_fixed_manuf_overhead = cost_data['fixed_costs']['manuf_overhead']
var_fixed_sell_admin = cost_data['fixed_costs']['selling_admin_expenses']
var_net_income = contrib_margin - var_fixed_manuf_overhead - var_fixed_sell_admin
print("\n === Income Statement ===")
print("Variable cost\n Cost of Goods Sold")
print(" Sales ...... ${:,}".format(var_sales))
print(" variable manufacturing costs .......... ${:,}".format(var_manuf_costs))
print(" end inventory ......................... ${:,}".format(end_inventory))
print(" variable cost of goods sold ........... ${:,}".format(var_cog_sold))
print(" variable selling & admin expenses ..... ${:,}".format(var_sell_admin_expense))
print(" contribution margin ................... ${:,}".format(contrib_margin))
print(" fixed manufacturing overhead ......... ${:,}".format(var_fixed_manuf_overhead))
print(" fixed selling & admin expenses ........ ${:,}".format(var_fixed_sell_admin))
print(" Net income ........................................... ${:,}".format( var_net_income))call the function
absorption_costing_compare( cost_data ) - Absorption vs Variable costing -
Absorption costing : manufacturing cost per unit ..... $13.0
Variable costing : manufacturing cost per unit ..... $9
difference in manufacturing cost per unit is $ 4.0
=== Income Statement ===
Absorption cost
Cost of Goods Sold
Sales ..... $400,000.0
Cost of goods manufactured ............ $390,000.0
end of inventory ...................... $130,000.0
cost of goods sold .................... $260,000.0
gross profit .......................... $140,000.0
variable selling & admin expenses ..... $40,000.0
fixed selling & admin expenses ........ $15,000.0
Net income ........................................... $85,000.0
=== Income Statement ===
Variable cost
Cost of Goods Sold
Sales ...... $400,000.0
variable manufacturing costs .......... $270,000.0
end inventory ......................... $90,000.0
variable cost of goods sold ........... $180,000.0
variable selling & admin expenses ..... $40,000.0
contribution margin ................... $180,000.0
fixed manufacturing overhead ......... $120,000.0
fixed selling & admin expenses ........ $15,000.0
Net income ........................................... $45,000.0Absorption costing, both variable and fixed selling & admin expenses are treated as period costs. Under variable costing the fixed manufacturing overhead is charged as an expense.
Company makes sport balls, the company data is in a data dictionary.
sport_co = {
'variable_costs': {
'direct_materials': 0.10,
'direct_labor': 0.05,
'var_manuf_overhead': 0.08, # manufacturing overhead
'var_sell_admin_expense': 0.02 },
'fixed_costs': {
'fixed_manuf_overhead': 500e3,
'sell_admin_expense': 100e3
},
'begin_inventory': 0,
'units_sold': 7.5e6,
'units_produced': 8e6,
'selling_price': 0.5
}A function to calculate the cost of 1 unit of product using the absorption costing method
def absorption_costing( company: dict):
fixed_manuf_overhead = sport_co['fixed_costs']['fixed_manuf_overhead'] / sport_co['units_produced']
cpu_abs = sum( list( sport_co['variable_costs'].values() )[0:-1]) + fixed_manuf_overhead
# print(cpu_abs)
sales = sport_co['units_sold'] * sport_co['selling_price']
cog_sold = round( sport_co['units_sold'] * cpu_abs, 2)
gross_margin = sales - cog_sold
var_sell_admin_expense = sport_co['units_sold'] * sport_co['variable_costs']['var_sell_admin_expense']
fixed_sell_admin_expense = sport_co['fixed_costs']['sell_admin_expense']
net_income = gross_margin - (var_sell_admin_expense + fixed_sell_admin_expense)
print(" - Absorption Costing -" )
print(" sales ................ ${:,}".format(sales))
print(" cost of goods sold ............................... ${:,}".format(cog_sold))
print(" gross margin ..................................... ${:,}".format(gross_margin))
print(" variable selling & admin expenses ................ ${:,}".format(var_sell_admin_expense))
print(" fixed selling & admin expenses ................... ${:,}".format(fixed_sell_admin_expense))
print(" net income .................................................... ${:,}".format(net_income))Call the function
absorption_costing( sport_co ) - Absorption Costing -
sales ................ $3,750,000.0
cost of goods sold ............................... $2,193,750.0
gross margin ..................................... $1,556,250.0
variable selling & admin expenses ................ $150,000.0
fixed selling & admin expenses ................... $100,000.0
net income .................................................... $1,306,250.0Using the same sport company data for variable costing function
def variable_costing( company: dict):
cpu_abs = sum( list( sport_co['variable_costs'].values() )[0:-1])
# print(cpu_abs)
sales = sport_co['units_sold'] * sport_co['selling_price']
cog_sold = round( sport_co['units_sold'] * cpu_abs, 2)
gross_margin = sales - cog_sold
var_sell_admin_expense = sport_co['units_sold'] * sport_co['variable_costs']['var_sell_admin_expense']
contrib_margin = cog_sold + var_sell_admin_expense
fixed_manuf_overhead = sport_co['fixed_costs']['fixed_manuf_overhead']
fixed_sell_admin_expense = sport_co['fixed_costs']['sell_admin_expense']
net_income = sales - contrib_margin - (fixed_manuf_overhead + fixed_sell_admin_expense )
print(" - Variable Costing -" )
print(" sales ................ ${:,}".format(sales))
print(" variable cost of goods sold ...................... ${:,}".format(cog_sold))
print(" variable selling & admin expenses ................ ${:,}".format(var_sell_admin_expense))
print(" contribution margin .............................. ${:,}".format(contrib_margin))
print(" fixed manufacturing overhead ..................... ${:,}".format(fixed_manuf_overhead))
print(" fixed selling & admin expenses ................... ${:,}".format(fixed_sell_admin_expense))
print(" net income .................................................... ${:,}".format(net_income))call variable costing function
variable_costing( sport_co ) - Variable Costing -
sales ................ $3,750,000.0
variable cost of goods sold ...................... $1,725,000.0
variable selling & admin expenses ................ $150,000.0
contribution margin .............................. $1,875,000.0
fixed manufacturing overhead ..................... $500,000.0
fixed selling & admin expenses ................... $100,000.0
net income .................................................... $1,275,000.0Using the sports_co dictionary used previously to calculate the normal costing
sport_co['fixed_costs']['fixed_manuf_overhead'] / 10e60.05Normal costing function
def normal_costing( company: dict):
fixed_manuf_overhead = sport_co['fixed_costs']['fixed_manuf_overhead'] / 10e6
cpu_abs = sum( list( sport_co['variable_costs'].values() )[0:-1]) + fixed_manuf_overhead
# print(cpu_abs)
sales = sport_co['units_sold'] * sport_co['selling_price']
cog_sold = round( sport_co['units_sold'] * cpu_abs, 2)
var_sell_admin_expense = sport_co['units_sold'] * sport_co['variable_costs']['var_sell_admin_expense']
contrib_margin = cog_sold + var_sell_admin_expense
fixed_manuf_overhead = sport_co['fixed_costs']['fixed_manuf_overhead']
fixed_sell_admin_expense = sport_co['fixed_costs']['sell_admin_expense']
var_sell_admin_expense = sport_co['variable_costs']['var_sell_admin_expense'] * sport_co['units_sold']
# -----
unfav_vol_var = sport_co['fixed_costs']['fixed_manuf_overhead'] - (sport_co['fixed_costs']['fixed_manuf_overhead'] - sport_co['fixed_costs']['sell_admin_expense'])
gross_margin = sales - cog_sold - unfav_vol_var
expenses = [cog_sold, unfav_vol_var , var_sell_admin_expense , fixed_sell_admin_expense]
net_income = sales - sum(expenses)
print(" - Normal Costing -" )
print(" sales ....................... ${:,}".format(sales))
print(" variable cost of goods sold ...................... ${:,}".format(cog_sold))
print(" unfavorable volume variance ...................... ${:,}".format(unfav_vol_var))
print(" gross margin ..................................... ${:,}".format(gross_margin))
print(" variable selling & admin expenses ................ ${:,}".format(var_sell_admin_expense))
print(" fixed selling & admin expenses ................... ${:,}".format(fixed_sell_admin_expense))
print(" net income .................................................... ${:,}".format(net_income))Call the normal costing function
normal_costing(sport_co) - Normal Costing -
sales ....................... $3,750,000.0
variable cost of goods sold ...................... $2,100,000.0
unfavorable volume variance ...................... $100,000.0
gross margin ..................................... $1,550,000.0
variable selling & admin expenses ................ $150,000.0
fixed selling & admin expenses ................... $100,000.0
net income .................................................... $1,300,000.0Throughput costing (super variable costing) treats all costs as period expenses except for direct materials {much like variable costing system}.Product costs are only direct material costs, inventory is valued using only direct material costs and manufacturing costs are labelled as expenses in the accounting period when they occur. There are two criteria that should be met before using throughput costing:
Using the cost data from previous section
cost_data{'selling_price': 20,
'units_produced': 30000.0,
'units_sold': 20000.0,
'begin_inventory': 0,
'variable_costs': {'manufacturing': 9,
'direct_materials': 5,
'direct_labor': 3,
'var_overhead': 1},
'selling_admin_costs': 2,
'fixed_costs': {'manuf_overhead': 120000.0,
'selling_admin_expenses': 15000.0}}Throughput costing and variable costing for manufacturing cost per unit
thru_cpu = cost_data['variable_costs']['direct_materials']
var_cpu = sum( list( cost_data['variable_costs'].values())[1:] )
print("Throughput costing: direct materials = ${:,}".format(thru_cpu))
print("Variable costing: direct materials = ${:,}".format(var_cpu))Throughput costing: direct materials = $5
Variable costing: direct materials = $9def throughput_costing( company: dict):
sales = company['units_sold'] * company['selling_price']
direct_material_costs = company['units_produced'] * company['variable_costs']['direct_materials']
start_inventory = company['begin_inventory']
cog_sale = direct_material_costs - start_inventory
# print(cog_sale)
end_inventory = (company['units_produced'] - company['units_sold']) * company['variable_costs']['direct_materials']
var_cog_sold = direct_material_costs - end_inventory
thru_contrib_margin = sales - var_cog_sold
direct_labor_costs = company['units_produced'] * company['variable_costs']['direct_labor']
var_overhead_costs = company['units_produced'] * company['variable_costs']['var_overhead']
var_sell_admin_expense = company['units_sold'] * company['selling_admin_costs']
fixed_manuf_overhead = company['fixed_costs']['manuf_overhead']
fixed_sell_admin = company['fixed_costs']['selling_admin_expenses']
expenses = [direct_labor_costs, var_overhead_costs, var_sell_admin_expense, fixed_manuf_overhead, fixed_sell_admin]
total_other_op_costs = sum(expenses)
net_income = thru_contrib_margin - total_other_op_costs
print(" - Throughput Costing -" )
print(" sales ....................... ${:,}".format(sales))
print(" direct material costs ....................... ${:,}".format(direct_material_costs))
print(" ending inventory ............................ ${:,}".format(end_inventory))
print(" throughput contribution margin .............. ${:,}".format(thru_contrib_margin))
print("\t direct labor costs .......................... ${:,}".format(direct_labor_costs))
print("\t variable overhead costs ..................... ${:,}".format(var_overhead_costs))
print("\t variable sell & admin costs ................. ${:,}".format(var_sell_admin_expense))
print("\t fixed manufacturing overhead ................ ${:,}".format(fixed_manuf_overhead))
print("\t fixed sell & admin expenses ................ ${:,}".format(fixed_sell_admin))
print("\t total other operating costs .................... ${:,}".format(total_other_op_costs))
print(" net income ....................................................... ${:,}".format(net_income))Call the function
throughput_costing(cost_data) - Throughput Costing -
sales ....................... $400,000.0
direct material costs ....................... $150,000.0
ending inventory ............................ $50,000.0
throughput contribution margin .............. $300,000.0
direct labor costs .......................... $90,000.0
variable overhead costs ..................... $30,000.0
variable sell & admin costs ................. $40,000.0
fixed manufacturing overhead ................ $120,000.0
fixed sell & admin expenses ................ $15,000.0
total other operating costs .................... $295,000.0
net income ....................................................... $5,000.0this is a second version of the variable costing function
def variable_costing2( company: dict):
sales = cost_data['units_sold'] * cost_data['selling_price']
direct_material_costs = cost_data['units_produced'] * cost_data['variable_costs']['manufacturing']
start_inventory = cost_data['begin_inventory']
cog_sale = direct_material_costs - start_inventory
end_inventory = (cost_data['units_produced'] - cost_data['units_sold']) * cost_data['variable_costs']['manufacturing']
var_manuf_costs = cost_data['units_produced'] * cost_data['variable_costs']['manufacturing']
var_cogs_sold = cog_sale - end_inventory
var_sell_admin_expense = cost_data['units_sold'] * cost_data['selling_admin_costs']
contrib_margin = sales - (var_sell_admin_expense +var_cogs_sold )
fixed_manuf_overhead = cost_data['fixed_costs']['manuf_overhead']
fixed_sell_admin = cost_data['fixed_costs']['selling_admin_expenses']
net_income = contrib_margin -fixed_manuf_overhead - fixed_sell_admin
print(" - Variable Costing -" )
print(" sales ........................... ${:,}".format(sales))
print(" variable manufacturing costs ...................... ${:,}".format(var_manuf_costs))
print(" cost of goods available for sale ................. ${:,}".format(cog_sale))
print(" variable cost of goods sold ...................... ${:,}".format(var_cogs_sold))
print(" variable selling & admin expenses ................. ${:,}".format(var_sell_admin_expense))
print(" contribution margin ............................... ${:,}".format(contrib_margin))
print(" fixed manufacturing overhead ...................... ${:,}".format(fixed_manuf_overhead))
print(" fixed selling & admin expenses .................... ${:,}".format(fixed_sell_admin))
print(" net income .................................................... ${:,}".format(net_income))
variable_costing2(cost_data) - Variable Costing -
sales ........................... $400,000.0
variable manufacturing costs ...................... $270,000.0
cost of goods available for sale ................. $270,000.0
variable cost of goods sold ...................... $180,000.0
variable selling & admin expenses ................. $40,000.0
contribution margin ............................... $180,000.0
fixed manufacturing overhead ...................... $120,000.0
fixed selling & admin expenses .................... $15,000.0
net income .................................................... $45,000.0if (units produced) == units sold:
variable costing = throughput costing
if (units produced) > units sold:
variable costing > throughput costing
if (units produced) < units sold:
variable costing < throughput costingUsing the sport company data dictionary using a revised version of the throughput function
def throughput_costing2( company: dict):
sales = company['units_sold'] * company['selling_price']
direct_material_costs = company['units_produced'] * company['variable_costs']['direct_materials']
start_inventory = company['begin_inventory']
cog_sale = direct_material_costs - start_inventory
# print(cog_sale)
end_inventory = (company['units_produced'] - company['units_sold']) * company['variable_costs']['direct_materials']
var_cog_sold = direct_material_costs - end_inventory
thru_contrib_margin = sales - var_cog_sold
direct_labor_costs = company['units_produced'] * company['variable_costs']['direct_labor']
var_overhead_costs = company['units_produced'] * company['variable_costs']['var_manuf_overhead']
var_sell_admin_expense = company['units_sold'] * company['variable_costs']['var_sell_admin_expense']
fixed_manuf_overhead = company['fixed_costs']['fixed_manuf_overhead']
fixed_sell_admin = company['fixed_costs']['sell_admin_expense']
expenses = [direct_labor_costs, var_overhead_costs, var_sell_admin_expense, fixed_manuf_overhead, fixed_sell_admin]
total_other_op_costs = sum(expenses)
net_income = thru_contrib_margin - total_other_op_costs
print(" - Throughput Costing -" )
print(" sales ....................... ${:,}".format(sales))
# print(" direct material costs ....................... ${:,}".format(direct_material_costs))
# print(" ending inventory ............................ ${:,}".format(end_inventory))
print(" throughput contribution margin .............. ${:,}".format(thru_contrib_margin))
print("\t direct labor costs .......................... ${:,}".format(direct_labor_costs))
print("\t variable overhead costs ..................... ${:,}".format(var_overhead_costs))
print("\t fixed manufacturing overhead ................ ${:,}".format(fixed_manuf_overhead))
print("\t fixed sell & admin expenses ................ ${:,}".format(fixed_sell_admin))
print("\t variable sell & admin costs ................. ${:,}".format(var_sell_admin_expense))
print("\t total other operating costs .................... ${:,}".format(total_other_op_costs))
print(" net income ....................................................... ${:,}".format(net_income))
throughput_costing2(sport_co) - Throughput Costing -
sales ....................... $3,750,000.0
throughput contribution margin .............. $3,000,000.0
direct labor costs .......................... $400,000.0
variable overhead costs ..................... $640,000.0
fixed manufacturing overhead ................ $500,000.0
fixed sell & admin expenses ................ $100,000.0
variable sell & admin costs ................. $150,000.0
total other operating costs .................... $1,790,000.0
net income ....................................................... $1,210,000.0