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Variable costing and other costing methods

EEC currently uses a basic standard cost system. Management knows very little about other concepts of costing and the benefits of having multiple costing methods. Your superior has asked that you and your team put together a presentation to management explaining various costing concepts as it relates to EEC (explain the usage and benefits of each).

Individual Portion:

As an EEC corporate business financial analyst, you must have an expert understanding of the various costing methods. Within your groups, divide the costing concepts among the individual team members to analyze and become an expert in at least one costing concept within your group. Then write a paper to include the following:

the definition of the concept
how and when the concept could be used by EEC
how the application of the concept differs from the other concepts
its advantages and disadvantages

Costing Concepts:

This the topic I pick "variable costing"

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As an EEC corporate business financial analyst, you must have an expert understanding of the various costing methods. Within your groups, divide the costing concepts among the individual team members to analyze and become an expert in at least one costing concept within your group. Then write a paper to include the following:

the definition of the concept
how and when the concept could be used by EEC
how the application of the concept differs from the other concepts
its advantages and disadvantages

Costing Concepts:

This the topic I pick "variable costing"

Meaning of variable costing:

Variable costing means the method of costing in which the costs to be inventoried is the variable manufacturing costs. Here, fixed overhead costs are treated as the period cost along with the selling and administrative expenses incurred during the particular period. Variable costing can also be termed as the direct costing and marginal costing.

Definition of variable costing:

Method in which cost of a product or operation is determined by allocating to it an appropriate portion of variable (direct) costs. Direct costing treats fixed costs (overheads such as administrative and selling costs) as period costs (associated with time and not output).It is also called contribution costing.

Variable cost includes;
For product A $
Direct material 10
Direct Labour 8
Variable
Manufacturing
Overhead 7

Variable cost 25

Fixed factory expense is treated as period expense.
How and when the concept could be used by EEC
Variable costing is useful in the following cases:

1. Make or buy decision
2. Accepting the export order
3. Computation of Breakeven point
4. It is used in CVP analysis.
5. Inventory valuation and income determination
6. Determination of product mix
7. Determination of marketing mix.
8. Shut down or continue the operations
9. Optimum allocation of resources when some resources are limiting factor.

Example of application of variable costing:
In case of limiting factor
Contribution per unit of Product A is 4 and the contribution per unit of product B is $5. Product A requires 2 hours of direct labor and product B requires 3 hours of direct labor.

Here, labour hours are the limiting factor.
Therefore, contribution per labor hour needs to be found out.
Contribution per hour in case of product A is $2 per hour and the contribution per hour of product B is $1.67.Therefore, if there is no limitations, more units of product A is to be produced compared to the product B.

Accepting the export order
Likewise, if EEC is utilizing the capacity of only 80%, then EEC can accept the export order and it can utilize the unutilized capacity even if the price of the product of the export order is less than the product cost. But the price should be more than the variable cost. Therefore, any excess of sale price over the variable cost will lead to contribution and the resultant increase in the profit. But EEC has to ensure that because of accepting the export order at the variable cost should ...

Solution Summary

The answer contains meaning,definition ,advantages, disadvantages of variable costing,marginal costing vs absorption costing, income statement under absorption and marginal costing,variable costing vs normal costing,varaible costing vs process costing,variable costing vs standard costing,variable costing vs actual costing,break even point,marginal cost statement and the decisions regarding limiting factor,export order,make or buy decision,shut down or continue operations,product mix,market limitation,

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