VCE Accounting Unit 4

1. 18.6
IMPACT OF PRODUCT
COSTING ON PROFIT

2. © Michael Allison, Trinity Grammar School.
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 Does Product Costing have any impact on profit compared to
Period Costing?
 Won’t they just result in the same profit at the end of the
period?
IMPACT OF PRODUCT COSTING ON PROFIT
Product Costing Period CostingVs.

3. © Michael Allison, Trinity Grammar School.
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 Example: a business buys 5 fridges on 1 March and is charged
a cartage inwards fee of $200 for delivery from the supplier.
 The business is unsure whether to treat the cartage inwards
as either a:
 Product Cost: at a rate of $40 for every unit sold
 Period Cost: costed upfront at $200 before any units are sold
IMPACT OF PRODUCT COSTING ON PROFIT
$200Supplier Business

4. © Michael Allison, Trinity Grammar School.
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 Product Cost: at a rate of $40 for every unit sold
 Period Cost: costed upfront at $200 before any units are sold
IMPACT OF PRODUCT COSTING ON PROFIT
Sell 1 unit $40 $200 Profit = $160 Higher
Sell 2 units $80 $200 Profit = $120 Higher
Sell 3 units $120 $200 Profit = $80 Higher
Sell 4 units $160 $200 Profit = $40 Higher
Sell 5 units $200 $200 Profit = Same
Product Costing Period Costing Impact on Profit

5. © Michael Allison, Trinity Grammar School.
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IMPACT OF PRODUCT COSTING ON PROFIT
40
80
120
160
200
200 200 200 200 200
0
40
80
120
160
200
1 unit sold 2 units sold 3 units sold 4 units sold 5 units sold
Product
Costing
Period
Costing

6. © Michael Allison, Trinity Grammar School.
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 Questions…
 Why is profit the SAME when ALL units are sold?
 Why is profit DIFFERENT when NOT all units are sold?
 Because…
IMPACT OF PRODUCT COSTING ON PROFIT
Product costing
Only expenses a cost when the stock is
sold
For example, the cartage inwards:
• 1 unit sold = $40 expense
• 5 units sold = $200 expense
Period costing
Expenses all of the cost upfront
regardless of the number of items sold
For example, the cartage inwards:
• 1 unit sold = $200 expense
• 5 units sold = $200 expense

7. © Michael Allison, Trinity Grammar School.
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 So as a rule…
IMPACT OF PRODUCT COSTING ON PROFIT
If Product Costing is used for a particular cost instead of Period Costing…
Profit will be the higher if some units remain unsold
Profit will be the same if ALL units are sold

8. © Michael Allison, Trinity Grammar School.
Author’s permission required for external use
TASK
In-class Homework
Ex18.3 X
Ex18.4 X