Lecture 7 SP2007

Lecture 7 SP2007 - And Blah Blah Blah Variable Costing A...

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Variable Costing: A Tool for Management And Blah And Blah , , Blah, Blah, Blah,

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Overview of Absorption and Variable Costing Direct materials Direct labor Variable mfg. overhead Fixed mfg. overhead Selling & Admin. exp. Absorption Costing Variable Costing Possible Costs
Overview of Absorption and Variable Costing Direct materials Direct labor Product costs Variable mfg. overhead Fixed mfg. overhead Period costs Selling & Admin. exp. Absorption Costing Variable Costing Possible Costs

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Overview of Absorption and Variable Costing Direct materials Direct labor Product costs Product costs Variable mfg. overhead Fixed mfg. overhead Period costs Period costs Selling & Admin. exp. Absorption Costing Variable Costing Possible Costs
Illustration #1: Variable Costing (P = S) Assume unit Sales equals 400,000 @ \$5/unit Assume unit Production is 400,000 units with the following production costs: DM, DL AND V(MFG) OH = \$ 1.25/UNIT VC (SG&A) = \$ 1.00/UNIT FIXED MANUFACTURING =\$ 100,000 FIXED SG&A =\$ 250,000

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First, calculate the per unit product cost using each method of reporting. This is determined as follows (When unit production is 400,000 units): Absorption Costing Variable Costing Direct materials, direct labor, and variable mfg. overhead 1.25 \$ 1.25 \$ Fixed mfg. Overhead (absorption only) (\$100,000 ÷ units produced) 0.25 \$ - \$ Unit product cost 1.50 \$ 1.25 \$ @ \$5.00 /unit Assume unit Production is 400,000 units with the following production costs: DM, DL, and V(MFG) OH = \$1.25 / unit VC of S,G,&A = \$1.00 / unit Fixed Manufacturing Cost = \$100,000 Fixed S,G,&A = \$250,000
Remember, Selling and administrative expenses (BOTH FIXED AND VARIABLE) are always treated as period expenses (never as product costs, regardless of the approach taken) and deducted from revenue at the time incurred. Also remember that Fixed Manufacturing Overhead costs are treated as a product cost when using the Absorption Costing method, and as a period cost when using the Direct/variable Costing method.

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Sales X = - \$ Less Variable Costs: Manufacturing (VC) X S, G & A (VC) X = - \$ Contribution Margin X = - \$ Less Fixed Costs: Manufacturing (FC) S, G & A (FC) = - \$ Net Income = - \$ Variable/Direct Costing Income Statement First Set Up your VC Income Statement Direct: P =S
Sales 5.00 \$ X 400,000 = 2,000,000 \$ Less Variable Costs: Manufacturing (VC) X S, G & A (VC) X Contribution Margin X Less Fixed Costs: Manufacturing (FC) S, G & A (FC) Net Income Now, Fill-in the Given Sales Information Assume unit Sales are 400,000 @ \$5.00 /unit Assume unit Production is 400,000 units with the following production costs: DM, DL, and V(MFG) OH = \$1.25 / unit VC of S,G,&A = \$1.00 / unit Fixed Manufacturing Cost = \$100,000 Fixed S,G,&A = \$250,000 Direct: P =S

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Sales 5.00 \$ X 400,000 = 2,000,000 \$ Less Variable Costs: Manufacturing (VC) 1.25 \$ X 400,000 S, G & A (VC) X Contribution Margin X Less Fixed Costs: Manufacturing (FC) S, G & A (FC) Net Income Now, the Variable Manufacturing Cost Information Assume unit Sales are 400,000 @ \$5.00 /unit Assume unit Production is 400,000 units with the following production costs: DM, DL, and V(MFG) OH = \$1.25 / unit VC of S,G,&A = \$1.00 / unit Fixed Manufacturing Cost = \$100,000 Fixed S,G,&A = \$250,000 Direct/Variable Costing Income Statement (P = S) Direct: P =S
Sales 5.00 \$ X 400,000 = 2,000,000 \$ Less Variable Costs: Manufacturing (VC) 1.25 \$ X 400,000 S, G & A (VC) 1.00 \$ X 400,000 = 900,000 \$ Contribution Margin X Less Fixed Costs: Manufacturing (FC) S, G & A (FC) Net Income

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Lecture 7 SP2007 - And Blah Blah Blah Variable Costing A...

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