Information to assist your study of Management Theories and Principles more interesting Friday, July 1, Different Types of Transfer Pricing Methods For each of the under-noted transfer pricing methods, discuss the market conditions appropriate for their adoption and their limitations. In this situation, internal transfers will result in a need to sacrifice external sales.
Activity-Based Costing If your small business is a manufacturing company, you have the choice of using absorption costing or variable costing in determining your profits. You must learn the implications of each before making this choice.
While either method of accounting for costs is valid under generally accepted accounting principles, the method you choose can affect your profit-reporting.
Fixed Overhead Costs You must understand fixed overhead expenses in order to understand absorption costing and variable costing.
Fixed overhead consists of expenses that do not change with your level of production. Examples of fixed overhead include rent, insurance, wages for permanent full-time employees, and lease payments on equipment.
These expenses continue no matter what your level of sales or how much you manufacture. Absorption Costing Absorption costing is a method whereby you apply part of your fixed overhead costs to the cost of manufacturing products. You do this on a per-unit basis. Simply divide your fixed costs by the number of units you manufactured and sold during the period.
The result is a cost per unit for each unit you made and sold. Variable Costing Variable costing uses fixed overhead as a lump sum, rather than a per-unit, expense.
Under this method, you include all your variable costs such as supplies, raw materials and shipping. You add the full cost of fixed overhead for the period. You do not figure these expenses on a per-unit basis. Instead you subtract them from your revenue figure as a lump-sum expense.
Advantages of Absorption Costing Absorption costing offers an advantage when you do not sell all of your manufactured products during the accounting period.
You may have finished goods in inventory. Because you assign a per-unit amount for fixed expenses, each product in inventory has a value that includes part of the fixed overhead.
You do not show the expense until you actually sell the items in inventory. This can improve your profits for the period. Disadvantages of Absorption Costing Absorption costing can artificially inflate your profit figures in any given accounting period.
This can mislead you when you are analyzing your profitability. Advantages of Variable Costing Variable costing shows your profits after all the bills have been paid for the accounting period.If your small business is a manufacturing company, you have the choice of using absorption costing or variable costing in determining your profits.
Cost accounting is an accounting method that aims to capture a company's costs of production by assessing the input costs of each step of production as well as fixed costs.
An amount that has to be paid or given up in order to get something.. In business, cost is usually a monetary valuation of (1) effort, (2) material, (3) resources, (4) time and utilities consumed, (5) risks incurred, and (6) opportunity forgone in production and delivery of a good or service.
All expenses are costs, but not all costs (such as those incurred in acquisition of an income. Whole-life cost, or Life-cycle cost (LCC), refers to the total cost of ownership over the life of an asset.
Also commonly referred to as "cradle to grave" or "womb to tomb" costs.
Costs considered include the financial cost which is relatively simple to calculate and also the environmental and social costs which are more difficult to quantify and assign numerical values. In economics, an externality is the cost or benefit that affects a party who did not choose to incur that cost or benefit.
When there is no externality, allocative efficiency is achieved; however, this rarely happens in the free market. [unreliable source?] [better source needed].Economists often urge governments to adopt policies that will "internalize" an externality, so that costs and.
In economics, an externality is the cost or benefit that affects a party who did not choose to incur that cost or benefit. Economists often urge governments to adopt policies that "internalize" an externality, so that costs and benefits will affect mainly parties who choose to incur them.