Absorption Costing vs Variable Costing

In: Business and Management

Submitted By rabiakhalid
Words 4451
Pages 18

International Journal of Financial Research

Vol. 5, No. 1; 2014

Shareholders’ Wealth and Debt- Equity Mix of Quoted Companies in
Amos O. Arowoshegbe1 & Francis Kehinde Emeni2

Department of Accounting, Ambrose Alli University, Ekpoma, Edo State, Nigeria


Department of Accounting, University of Benin, Benin City, Edo State, Nigeria

Correspondence: Amos O. Arowoshegbe Ph.D; ACA., Department of Accounting, Ambrose Alli University,
Ekpoma, Edo State, Nigeria. Tel: 234-80-3742-2421. E-mail: futona4christ2@gmail.com
Received: October 15, 2013 doi:10.5430/ijfr.v5n1p107 Accepted: October 31, 2013

Online Published: January 10, 2014

URL: http://dx.doi.org/10.5430/ijfr.v5n1p107

The study examined the relationship between shareholders’ wealth and debt-equity mix of quoted companies in
Nigeria. The study was based on a panel data set from 1997 to 2011 comprising sixty non – financial companies. The study specified two panel regression models. Two measures of shareholders’ wealth: Return on Equity (ROE) and
Earnings per Share (EPS) were taken as the dependent variables respectively. The principal explanatory variable for each of the models was Debt Ratio (DR). The results of the study conform to our a-priori expectation that there is a significant negative relationship between shareholders’ wealth and debt-equity mix of quoted companies in Nigeria.
This is not unexpected considering the inactive debt market in Nigeria, the dominance of the money market in the
Nigerian financial system, the shallow nature of the Nigerian capital market, the buy-hold syndrome of the Nigerian investors and the macro economic instability in the country. It was recommended that adequate fiscal policies, relevant capital market institutional and legal framework should be put in place. These measures, we believe, will enhance the development of the…...

Similar Documents


...criteria the evidence must show that the student is able to: | | Task no. | | Evidence | 1 | explain the importance of costs in the pricing strategy of an organisation changes | | 1.1 | | 9 | 1 | design a costing system for use within an organisation resource | | 1.2 | | 17 | 1 | propose improvements to the costing and pricing systems used by an organisation | | 1.3 | | 21& 24 | 2 | apply forecasting techniques to make cost and revenue decisions in an organisation | | 2.1 | | | 2 | assess the sources of funds available to an organisation for a specific project | | 2.2 | | | 2 | select appropriate budgetary targets for an organisation | | 3.1 | | | 3 | participate in the creation of a master budget for an organisation | | 3.2 | | | 3 | compare actual expenditure and income to the master budget of an organisation | | 3.3 | | | 3 | evaluate budgetary monitoring processes in an organisation | | 3.4 | | | 4 | Absorption costing and Activity Based costing based on the results explain the importance of costs in the pricing strategy of Quality manufacturers | | 4.1 | | | 4 | design a costing system for use within Quality manufacturers for better pricing. | | 4.2 | | | 4 | propose improvements to the costing and pricing systems used by Quality manufacturers | | 4.3 | | | 5 | apply financial appraisal methods to analyse competing investment projects in the public and private sector | | 5.1 | | | 5 | make a......

Words: 3051 - Pages: 13

Process Order Costing vs Job Order Costing

...Process Costing - The Hershey Company/ Kaiser Aluminum Process costing is used mostly in companies when converting raw materials into homogenous products. A single product is produced on a continuous basis and all units of the product are identical. Costs are computed by department where the materials, labor, or overhead costs are added to the product in the processing department. Our two companies, The Hershey Company and Kaiser Aluminum, convert raw materials to their finished products of chocolate and aluminum. The Hershey Company's main raw materials come from cocoa products such as cocoa liquor, cocoa butter and cocoa powder that is processed from cocoa beans. They continuously make certain chocolate products under their brand name or franchise. Under their annual report it states that their cost of sales represents the costs directly related to the manufacture and distribution of their products. These costs are the raw materials, packaging, direct labor, overhead, shipping and handling, and warehousing and distribution facilities. Their manufacturing overhead includes salaries, wages, utilities, maintenance and property taxes. This shows why The Hershey Company would use process costing because their costs are traced to only a few departments and there aren't significant differences among the costs of various products. They are continuously making large batches of chocolate products and use an assembly line of mixing, refining, molding and wrapping to do it. Kaiser......

Words: 658 - Pages: 3

Absorption Costing vs Variable Costing

...In comparison to absorption costing which is used for external purpopses and which is required by accounting standards, variable costing is a costing tool that is used for internal decision-making purposes. The logic of variable costing differs from absorption costing as it assigns only variable costs to inventory and cost of goods sold. When using variable costing your product costs would therefore consist of Direct Material, Direct Labor, and Variable Manufacturing Overhead. With variable costing variable SG& A expenses, and fixed SG&A expenses are classified as period expenses – new is that also fixed manuf. OH costs are assigned to period costs. Since variable costing and absorption costing classify costs differently, the per unit costs that are calculated under each system differ. On the slide you can see an example of a situation where product costs under absorption and variable costing are calculated. When taking a look at absorption costing and variable costing you notice that the per unit cost differs by $4. Let’s take a look how the different prices are calculated. For absorption costing you take direct material for $5 into account, you add $4 for direct labor, then you add variable manuf. OH for $1, then you take fixed MOH per year which are $20,000 and divide them by sells, in this case 5,000 units and you get $4 which have to be added to the unit costs. As a result you get $14 per unit. Under variable costing you disregard fixed MOH and simply add up direct......

Words: 460 - Pages: 2

Marginal Costing

...MARGINAL COSTING Introduction: MARGINAL COST: Marginal Cost is the additional cost of producing an additional unit of product. In simple, marginal cost is the extra cost of an extra unit of production. It is the total of all variable costs. It composed of all direct costs and variable costs. The CIMA, London, defines marginal cost “as the amount at any given volume of output by which aggregate costs are changed, if volume of output is increased or decreased by one unit”. In other words, it is the cost of one unit of product which would be avoided if that unit were not produced. MARGINAL COSTING: It is also known as “VARIABLE COSTING” or “DIRECT COSTING”. The CIMA, London, defines marginal costing as “The accounting system in which variable costs are charged to cost units and fixed costs of the period are written off in full, against the aggregate contribution. Its special value is in decision making.” Marginal is a technique of costing, in which only variable costs are charged as product costs and included in inventory valuation. Fixed manufacturing costs are not allowed to products. CHARACTERISTICS OF MARGINAL COSTING: 1. Segregation of all costs into fixed and variable elements . 2. Marginal costs (variable costs) as product costs, are only charged to products. 3. Fixed costs as period costs, are charged to costing P &L account. 4. Contribution: is the difference between sales value and marginal cost of sales. 6. Pricing: In marginal costing,......

Words: 1136 - Pages: 5

Variable Costing

...Chapter 12 Variable Costing (Direct Costing) is a method of recording and reporting costs which regards only the variable manufacturing costs as product costs. Fixed manufacturing costs are written off as period costs. It includes only variable production costs in product costs. DM, DL and VMO costs would ordinarily be included in product costs under variable costing. FMO is not treated as a product cost under this method. Underlying Concept: * Proponents of this product costing method maintain that the fixed part of factory overhead is more closely related to the capacity to produce than to the production of the specific units and therefore should be charged off as expense in the period incurred. * Variable Costing is for Managerial decision making purposes. * Not acceptable for financial reporting or tax purposes. * Absorption Costing is for external reporting purposes. * Not intended to discourage to the use of Variable Costing for internal management purposes. Advantages of Using Variable Costing It meets the THREE OBJECTIVES of management control system; * By showing separately those costs that can be traced to; * Controlled by each strategic business unit (SBU); * Net income using variable costing is not affected by changes in inventory levels because all fixed costs are deducted from income in the period which they occur. Disadvantages of Using Variable Costing 1) Variable costing may encourage a shortsighted......

Words: 807 - Pages: 4

Costing Methods

...Costing Methods ACC 561 July 15, 2014 Costing Methods Absorption and variable costing are two methods an organization such as Polk Company can employ when accounting for costs and generating income statements. The differences between the two methods are focused on the types of costs absorbed or assigned to the product, specifically fixed and variable overhead expenses as well as when fixed overhead manufacturing costs are allocated. In absorption costing all costs are charged to the product including direct materials, direct labor, variable manufacturing overhead, and fixed manufacturing overheard (Kimmel, Weygandt, Kieso, 2011). In variable costing direct materials, direct labor, and variable manufacturing overhead is charged to the product, and fixed overhead expenses are considered period costs (Kimmel et al. 2011). In addition, full absorption costing is considered a generally accepted accounting principle (GAAP) and used for external reporting purposes whereas variable costing is used for internal reporting (Stevenson, Barnes, & Stevenson, 1993). The Polk Company benefits more from using the absorption method because the overhead expense is allocated on the basis of 80,300 units sold. The variable costing method calculates the fixed overheard costs based on the 94,500 units produced for the period. In this case the absorption method provides management with a more accurate assessment of the fishing lure profitability. Under the absorption costing method, the......

Words: 488 - Pages: 2

Marginal Costing

...Marginal Costing Dr. Shubhra Product Costing There are mainly two techniques of product costing and income determinationAbsorption Costing: This is a total cost technique under which total cost (i.e., fixed cost as well as variable cost) is charged as production cost. In other words, in absorption costing, all manufacturing costs are absorbed in the cost of the products produced. Marginal Costing: An alternative to absorption costing is marginal costing, also known as ‘variable costing’ or direct costing. Under this technique, only variable costs are charged as product costs and included in inventory valuation. Fixed manufacturing costs are not allotted to products but are considered as period costs and thus charged directly to Profit and Loss Account of that year. Fixed costs also do not enter in stock valuation. Marginal Costing: Definition CIMA London as ‘The accounting system in which variable costs are charged to cost units and fixed costs of the period are written off in full, against the aggregate contribution. Its special value is in decision making’. Segregation of costs into fixed and variable elements • In marginal costing all costs are classified into fixed and variable. Semi-variable costs are also segregated into fixed and variable elements. Marginal costs as products costs • Only marginal (variable) costs are charged to products produced during the period. Fixed costs as period costs • Fixed costs are treated as......

Words: 1480 - Pages: 6

Comparison of Variable and Absorption Costin

... Comparison of Variable and Absorption Costing OMGT422 – Managerial Accounting August 7, 2015 P S Summary There are two types of costing methods and they are absorption and variable costing methods and they refer to the way in which product costs are determined. Absorption costing is a method that aims to include all expenses including overheads in the calculation of the cost of producing goods or services and variable costing treats fixed factory overhead as a period expense. These variable costs consist of direct materials, direct labor, and variable factory overhead. Most companies use absorption and variable costing together, both of the systems have their own benefits and limitations. Absorption Costing * According to Mowen & Heitger chapter 8, “absorption costing uses fixed factory overhead as a product cost. Unit product cost consists of direct materials, direct labor, variable factory overhead, and fixed factory overhead.” Companies may use absorption costing if they want to gain a full understanding of the extent to which costs are covered by sales income. An absorption cost is required for external reporting and is a general accepted accounting principle that the Internal Revenue Service will accept. * Variable Costing * Variable costing treats fixed factory overhead as a period expense. Unit product cost consists of direct materials...

Words: 518 - Pages: 3


...The first factor is costing. Costing concerns setting a price for a product or service so that a profit is made and arriving at a correct valuation for stock. (Jones, 2012). The reason why cost are used in many different ways is to fulfil the need of management according to their department. For example, for the purpose of accounting for costs in manufacturing companies, cost are classified into two divisions which are manufacturing costs and non-manufacturing cost. Manufacturing cost consist of direct materials, direct labour and manufacturing overhead while non-manufacturing costs consist of selling costs and administrative cost. Another example is for the purpose of preparing financial statements, costs are classified into product costs and period costs. Tools and techniques that used to drive costing factor are absorption costing and activity based costing. Absorption costing is the method under which all manufacturing costs, both variable and fixed, are treated as product costs with non-manufacturing costs, for example, selling and administrative expenses, being treated as period costs. Absorption costing treats all manufacturing cost as product costs, regardless of whether they are variable or fixed. The cost of a unit of product under the absorption costing method consists of direct materials, direct labor, and both variable and fixed manufacturing overhead. Thus, absorption costing allocates a portion of fixed manufacturing overhead cost to each unit......

Words: 259 - Pages: 2


...different models for costing could be used in your company. It is important that you, at least, cover the following four models; process costing (batch costing), absorption costing, contribution costing, and ABC Process costing The company Danone doesn’t produce only one type of product but products lines. Thus, we can use this model if we take only one type of product that is produced in one local. For example, to produce bottles of water Volvic, there are variable costs (the raw material cost like plastic and caps, the energy cost) that depend on the volume and fixed costs (salaries cost, machine depreciation cost). If we know the production volume, all fixed costs and variable costs for a type of product (water bottles Volvic), we can calculate the price of a single product (one water bottle). Contribution costing This model can be used if we want to make a choice between two different products. For example, Danone wants to make a choice between yogurts of 50ml and yogurts of 75ml. What type of product must Danone choose to produce? The data about each bottle are: * Selling price: 1,5 Euros (50 ml) / 2 Euros (75 ml) * Variable relevant cost: 0,3 Euros (50 ml) / 0,5 Euros (75 ml) * Machine time per unit: 6 second (50ml) / 10 second (75ml) * Contribution : 1,2 Euros (50 ml) / 1,5 Euros (75 ml) * Contribution/sec: 0,2 yogurts of 50 ml per second and 0,15 yogurt of 75 ml per second Thanks to the contribution costing analysis, the......

Words: 414 - Pages: 2


...are Relevant Costs, Sunk Costs, Opportunity cost, Incremental cost. Session 2 Methods of Costing are Industry Specific. Job Costing, Process Costing, Unit Costing, etc... Unit costing is generally used for large scale mass production products or services. Terms: Prime Cost,Works Cost, Cost of Productionr or Cost of Goods Manufactured, Cost of goods sold, Cost of Sale, etc...... Process costing determines the NORMAL PROCESS COST of a process in each period. Normal Process Cost = Total cost of process in excess of realisable value of Normal loss DIVIDED by Normal Output[which is Input less normal loss]!!! Abnormal loss and Abnormal gain output are always valued at the Normal Cost. Session 3 How do Volumes impact Revenues, Costs and Profit. Terminology to understand: BEP(single product and multiple product], MOS,PVR or CMR . the meaning, and application of these numbers to different Business applications..and may be in personal life too! Key applications: Short term pricing, product mix decisions, resource allocation decisions, make or buy decisions, profit planning and volume planning decisions, make or buy decisions, maximising or optimising profit under constraints[intro to TOC]. Significance of the number CONTRIBUTION in most decision making situations using CVP. Session 4 : The PTC Case: Experiencing the difficulty of identifying and classifying costs into fixed and variable. Irrelevance of certain fixed costs in decisions like closing down the Subsidiary......

Words: 334 - Pages: 2


...C H A P T E R F I V E INTRODUCTION TO COST MANAGEMENT Activity-Based Costing and Management After studying this chapter, you should be able to . . . 1. Explain the strategic role of activity-based costing 2. Describe activity-based costing (ABC), the steps in developing an ABC system, and the benefits and limitations of an ABC system 3. Determine product costs under both the volume-based method and the activity-based method and contrast the two 4. Explain activity-based management (ABM) 5. Describe how ABC/M is used in manufacturing companies, service companies, and governmental organizations 6. Use an activity-based approach to analyze customer profitability 7. Identify key factors for successful ABC/M implementation PART I Beware of little expenses. A small leak will sink a great ship. Benjamin Franklin This chapter has a lot to do with implementing the spirit of Benjamin Franklin’s observation—in cost management terms—that it really does matter how accurately you calculate a cost. Why? Having accurate costs is important for a variety of reasons: a company might find that it has a difficult time determining which of its products is most profitable. Alternatively, it finds its sales increasing but profits declining and cannot understand why. Perhaps the company keeps losing competitive bids for products and services and does not understand why. In many cases, accurate cost information is the answer to these questions. Accurate cost information provides a......

Words: 26467 - Pages: 106

Absorption vs Variable Costing

...Group Case Project: Absorption Costing vs. Variable Costing Javkhlantugs Altansukh Ana Barrios Cameron R. Bates Kyle Brown Absorption Costing Absorption costing is a costing system in which the direct labor, direct materials, and fixed and variable manufacturing overhead costs are traced to every finished product. Thus, in the absorption costing system, all costs are product costs regardless of their classification of variable or fixed. Because of its characteristic of no cost discrimination, absorption costing is also known as full costing or as full absorption method (¨Absorption¨ 1). The absorption costing is the only method approved by the generally accepted accounting matching principle (GAAP). Thus, it is required by law to use this system for external financial statements (Lohrey 1). The absorption costing also provides accuracy of the calculation in taxes reporting (1). Experts say that the absorption costing method provides a complete picture of cost calculation and it is helpful to accurately track profit during an accounting period (Cunagin 1). In fact, this method is in compliance with the GAA matching principle which states that all expenses and revenues must be reported in the same period (Lohrey 1). Production Process A simplified production process starts with the purchase of direct materials and ends with the sale of the finished goods. To account this process the following steps should be made. When the direct materials are purchased,......

Words: 4183 - Pages: 17


...COST ACCOUNTING II MARGINAL COSTING AND DECISION MAKING Prepared by Teddy Ossei Kwakye Lesson Objectives Distinguish between relevant and irrelevant revenues and costs Analyze relevant costs and indicate how they differ under alternative decision scenarios Apply differential analysis to decision scenarios, including discontinuation decisions; to accept a special order; to make or buy and to sell or further process a product Allocate limited resources for purposes of maximizing short-run profit Decision Making Process Objectives Setting • Relates to the future, hence decisions are future oriented Determination of Alternatives • Different alternatives to achieving the objectives, hence decision is a choice of alternatives Evaluating the alternatives • Requires complete, timely, relevant and reliable information Choosing the best alternative • Alternative chosen should be the one that maximizes the objectives Relevant Information Information that is affected by a decision • Information that is independent or has nothing to do with decision is irrelevant Types / Kinds • Quantitative information - Elements that can be expressed in monetary terms • Qualitative information - Factors that are difficult to quantify in monetary terms e.g. moral of employees, customer goodwill etc. Quantitative Relevant Information Relevant Costs and Revenues • Costs (revenues) that flow from the decision • Future or expected costs (revenues) • Must...

Words: 3197 - Pages: 13


...ASSIGNMENT ON COSTING Submitted By, MOHAMMED NAFAISE QUESTIONS 1. Define the term cost. Explain various types with relevant examples? 2. Methods and techniques of with relevant industrial examples? COST The cost is defined as the amount which is paid or given up to get something or to achieve the objective of the business. In business the objective may be to make a product, to provide a particular service and so on. Cost is usually a monetary valuation of effort, material, resources, time and utilities consumed risks incurred, and opportunity forgone in production and delivery of a good or service. The costs incurred by a business may be classified in various ways and one important way is according to how they behave in relation to changes in the volume of activity. There are: Based on behavior two types of cost are there 1.FIXED COST: those are fixed when changes occur to the volume of activity. Ex: the salary of employees, rent… 2.VARIABLE COST: these are cost which vary according the volume of activity. Ex: cost of raw materials used in manufacturing a product. DIFFERENT TYPES OF COST WITH EXAPLES * SEMI-FIXED(SEMI-VARIABLE )COST: In some cases, particular costs have an element of both fixed and variable cost. Thesecan be described as semi-fixed (semi-variable) costs. * Ex: telephone bill, electricity bill. * Actual Cost Actual cost is defined as the cost or expenditure......

Words: 2174 - Pages: 9