Accounting Information Systems and Business Processes
The nature and types of business processes vary, depending on the information
needs of a specific organization. Nevertheless, several business processes are
common to most organizations. Some of the examples are sales process (sales and
cash collection) and the purchasing process (expenditures for materials and
supplies and cash payment) Businesses are under tremendous pressure to cut
costs, reduce capital expenditures, and become as efficient as possible at their core
competencies. As a result, companies search globally to achieve efficiencies--it's
called business without boundaries.
Collecting and reporting accounting information
Most of the accounting data collected by an organization ultimately appear on some
type of internal and/or external report. Thus, the design of an effective AIS usually
begins with the outputs (reports) that users will expect from the system.
Among of the outputs of an AIS are:
1. Report to management
2. Reports to investors
3. Statement of Financial Position
4. Statement of Financial Performance
Designing Reports
Good output reports share similar characteristics regardless of their type, such as:
1. Useful
2. Convenient format
3. Easy to identify, and
4. Consistent.
Other graphical formats include bar charts and trend lines.
PRODUCT COSTING
ABSORPTION COSTING (also called full costing, conventional costing)
- costing method that Includes all manufacturing costs (direct materials, direct
labor, and both variable and fixed manufacturing overhead) in the cost of a
unit of product. It treats fixed manufacturing overhead as a product cost
VARIABLE COSTING (also called direct costing)
- costing method that includes only variable manufacturing costs (direct
materials, direct labor, and variable manufacturing overhead) in the cost of a
unit of product. It treats fixed manufacturing overhead as a period cost.
DISTINCTIONSBETWEENPERIODCOSTSANDPRODUCTCOSTS
PERIOD COST PRODUCT COST
1. Refers to an item charged against current
1. Refers to an item included in product costing
revenue on the basis of time period regardless of
which is apportioned between the sold and
the difference between production and sales
unsold units.
volume.
2. The portion of the cost, which has been
2. Does not form part of the cost of inventory. allocated to the unsold units, becomes part of
the inventory.
3. Diminishes current income by that portion
3. Diminishes income for the current period by its thereof identified with the sold units only with the
full amount. remainder being deferred to the next accounting
period as part of the cost of ending inventory.
PRINCIPAL DIFFERENCES BETWEEN VARIABLE AND CONVENTIONAL ABSORPTION COSTING
ABSORPTION COSTING VARIABLE COSTING
Seldom segregates costs into variable and fixed
1. Cost segregation Costs are segregated into variable and fixed
costs
Cost of inventory includes all the manufacturing Cost of inventory includes only the variable
2. Cost of Inventory costs: materials, labor, variable factory manufacturing costs: materials, labor, and
overhead, and fixed factory overhead variable factory overhead
3. Treatment of fixed factory
Fixed factory overhead is treated as product cost. Fixed factory overhead is treated as period cost.
overhead
Distinguishes between production and other
4. Income statement Distinguishes between variable and fixed costs.
costs.
Net income between the two methods may differ from each other because of the difference in the
amount of fixed overhead costs recognized as expense during an accounting period. This is due to
5. Net Income variations between sales and production: In the long run/ however, both methods give substantially
the same results since sales cannot continuously exceed production, nor production can
continually exceed
Variable and absorption costing methods of accounting for fixed manufacturing
overhead result in different levels of net income in most cases. The differences are-
timing differences, i.e, when to recognize the fixed manufacturing overhead as an
expense. In variable costing, it is expensed during the period when the fixed
overhead is incurred, while in absorption costing, it is expensed in the period when
the units to which such fixed overhead has been related are sold.
Production Equals Sales:
When production is equal to sales, there is no change in inventory. Fixed overhead
expensed under absorption costing equals fixed overhead expensed under variable
costing. Therefore, absorption costing income equals variable costing income.
Production is Greater Than Sales:
When production is greater than sales, there is an increase in inventory. Fixed
overhead expensed under absorption costing is less than fixed overhead expensed
under variable costing. Therefore, absorption income is greater than variable
costing.
Production is Less Than Sales:
When production is less than sales, there is decrease in inventory. Fixed overhead
expensed under absorption is greater than fixed overhead expensed under variable
costing. Therefore, absorption income is less than variable costing income.
ARGUMENTS FOR THE USE OF VARIABLE COSTING
1. Variable costing reports are simpler and more understandable.
2. Data needed for break-even and cost-volume profit analyses are readily
available.
3. The problems involved in allocating fixed costs are eliminated.
4. Variable costing is more compatible with the standard cost accounting
system.
5. Variable costing reports provide useful information for pricing decisions and
other decision-making problems encountered by management.
ARGUMENTS AGAINST VARIABLE COSTING
1. Segregation of costs into fixed and variable might be difficult, particularly in
the case of mixed
2. The matching principle is violated by using variable costing which excludes
fixed overhead from product costs and charges the same to period costs
regardless of production and sales.
3. With variable costing, inventory costs and other related accounts, such as
working capital, current ratio, and acid-test ratio are understated because of
the exclusion of fixed overhead in the computation of product cost.
Throughput Costing
An extreme form of variable costing in which only direct material costs are
included as inventoriable costs. All other costs are costs of the period in
which they are incurred Throughput margin = Revenue - Direct material cost
of the goods sold
Illustrative Example 1:
During the year 200A, Wouie Corporation's production was equal to its normal
capacity of 1,000 units. It sold 900 units at a price of P50 per unit.
The following costs were incurred during the year:
Total Cost Cost per Unit
Direct materials 12,000 12
Direct labor 10,000 10
Variable factory overhead 8,000 8
Fixed factory overhead 6,000 6
Variable sellingand administrative 4,500 5
Fixed selling and administrative 3,000 3
Requirement 1: Product costs per unit under absorption and variable costing
Requirement 2: Income under absorption costing
Requirement 3: How much is the Fixed overhead charged to COGS and the Total
ending inventory under Absorption Costing
Requirement 4: Income under variable costing
Requirement 5: Cost of ending inventory under variable costing
* Consists of variable manufacturing costs only. Fixed factory overhead is not an
inventoriable cost.
Requirement 6: Reconciliation of and accounting for the difference in income
Illustrative Example 2:
Irish Corporation uses a standard costing system for a product that it manufactures,
For the year 200A, the following standards were established based on normal
production of 1,000 units:
Materials (2 pcs @P6 per piece) 12
Labor (5 hrs. @P4 per hour) 20
Variable overhead (5hrs @P3 per hour) 15
Fixed factoryoverhead (5 hrs @P2) 10
Total standard cost per unit 57
Followingare the actual data for the year 200A:
Production 1100 units
Sales 950 units
Sellingprice 80
Materials (2,250 @P5.80) 13,050
Labor (5,420 hrs. @P4.30 per hour) 23,306
Variable overhead 15,718
Fixed factoryoverhead 12,000
Sellingand administrative expenses: 13,700
Variable 5,700
Fixed 8,000
Requirement 1. Variances for each cost element of production
Requirement 2: Comparative Income Statements - Absorption and Variable Costing
