5
Variable CHAPTER Costing
Full (Absorption) Costing Full (Absorption) Costing
Inventory Costs Include:
Direct Material Direct Labor All Manufacturing Overhead
Variable and Fixed Cost elements are combined in Manufacturing Overhead Required for GAAP
Full (Absorption) Costing Full (Absorption) Costing
Variable Costing Variable Costing
Inventory Includes:
Direct Material Direct Labor Variable Manufacturing Overhead
Enables organization to perform "what if" analysis Not allowed for GAAP
Variable Costing Variable Costing
Differences Between Full and Differences Between Full and Variable Costing Variable Costing
Fixed Manufacturing Overhead Under Full Costing, it is included in inventory and expensed when product is sold. Under Variable Costing, it is considered a period expense and expensed on the income statement in the period incurred.
Variable Costing Income Variable Costing Income Statement Statement
Utilizes contribution margin approach
All costs are classified as fixed or variable costs
Variable Costing Income Variable Costing Income Statement Example Statement Example
Full Costing Income Statement Full Costing Income Statement Example Example
Study Break #1 Study Break #1
Which of the following complies with GAAP for external reporting purposes?
a.Absolute costing b.Variable costing c.Fixed costing d.Full costing
Answer: d. Full costing
Study Break #2 Study Break #2
Which of the following lends itself well to internal decision making?
a.Absolute costing b.Variable costing c.Fixed costing d.Full costing
Answer: b. Variable costing
ClausenTube Example - Facts ClausenTube Example - Facts
ClausenTube Example ClausenTube Example
Quantity Produced = Quantity Sold
Full Costing Income Statement
ClausenTube Example ClausenTube Example
Quantity Produced = Quantity Sold
Variable Costing Income Statement
ClausenTube Example ClausenTube Example
Quantity Produced > Quantity Sold
Full Costing Income Statement
ClausenTube Example ClausenTube Example
Quantity Produced > Quantity Sold
Variable Costing Income Statement
Variable Costing for External Variable Costing for External Reporting Reporting
Example Exercise Information Example Exercise Information
Summit Manufacturing, Inc. produces snow shovels. The selling price per snow shovel is $25. Costs involved in production are:
Direct material $4 Direct labor $3 Variable manufacturing overhead $2 Total variable manufacturing cost per unit $9 Fixed manufacturing overhead per year $168,000 Fixed selling and administrative costs $152,000
Example Exercise #1 Example Exercise #1
During the year, Summit produces 42,000 snow shovels and sells 38,500 snow shovels. What is net income using full costing?
Example Exercise #1 Solution Example Exercise #1 Solution
Net Income using Full Costing
Sales ($25 x 38,500) $962,500 Cost of Goods Sold ($13 x 38,500) $500,500 Gross Margin $462,000 Selling Less and Administrative Expense $152,000 Net Income $310,000
Example Exercise #2 Example Exercise #2
During the year, Summit produces 42,000 snow shovels and sells 38,500 snow shovels. What is net income using variable costing?
Example Exercise #2 Solution Example Exercise #2 Solution
Net Income using Variable Costing
Sales ($25 x 38,500) Less Variable COGS ($9 x 38,500) Contribution Margin Less Fixed Costs: Fixed Manufacturing Overhead Fixed Selling and Administrative Net Income $962,500 $346,500 $616,000 $168,000 $152,000 $296,000
Impact of Method Selection on Impact of Method Selection on Income Statement Income Statement
Units Produced = Units Sold
No difference in income
Units Produced > Units Sold
Full costing yields higher income
Units Produced < Units Sold
Variable costing yields higher income
Reducing Production Reducing Production
Impact of JIT on Income Effects Impact of JIT on Income Effects
Companies using JIT typically have low levels of inventory. Units produced are approximately equal to units sold Difference between full and variable costing is likely to be very small.
Benefits of Variable Costing for Benefits of Variable Costing for Internal Reporting Internal Reporting
Variable Costing Facilitates C-V-P Analysis
Separates fixed and variable costs
Variable Costing Limits Management of Earnings with Production Volume
Does not allow management to inflate earnings
Study Break #3 Study Break #3
If units produced exceed units sold:
a. Full costing yields a higher income than variable costing b. Full costing yields a lower income than variable costing c. Full costing and variable costing yield the same income d. Variable costing yields a higher income than full costing
Answer: a. Full costing yields a higher income than variable costing
Study Break #4 Study Break #4
If units produced are less than units sold:
a. Full costing yields a higher income than variable costing b. Full costing yields a lower income than variable costing c. Full costing and variable costing yield the same income d. Variable costing yields a lower income than full costing
Answer: b. Full costing yields a lower income than variable costing
Impact of Changes in Sales Impact of Changes in Sales
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