Homework 7 SP2007 - 7:1.1 Absorption vs. Variable Costing...

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Unformatted text preview: 7:1.1 Absorption vs. Variable Costing Income Statements This problem will compare operational information presented under both the Absorption (Full Cost) and the Variable (Direct) costing approaches to reporting operational results. We start by identifying the relevant unit product costs to be used in our presentations: 7:1.1a First, we must understand that unit product cost includes just that: Product Costs. DO NOT include SG&A of any kind into this calculation! SG&A costs are ALWAYS period expenses and NEVER product costs! Take a look at the GIVEN information presented below: Absorption vs. Variable Costing Income Statements GIVEN: Selling Price $ 50 per unit Direct Material $ 18 per unit Direct Labor $ 7 per unit Variable Overhead $ 2 per unit Variable SG&A $ 5 per unit Fixed Overhead $ 160,000 Fixed SG&A $ 110,000 7:1.1a Since SG&A costs are ALWAYS period expenses and NEVER product costs, we can start by ignoring them, or by crossing them off from further consideration: Absorption vs. Variable Costing Income Statements GIVEN: Selling Price $ 50 per unit Direct Material $ 18 per unit Direct Labor $ 7 per unit Variable Overhead $ 2 per unit Variable SG&A $ 5 per unit Fixed Overhead $ 160,000 Fixed SG&A $ 110,000 7:1.1a The remaining costs (DM, DL, VOH and FOH) are the only possible product costs to be considered. In all cases, the DM, DL and the VOH will be treated as unit product costs. The FOH is treated as a unit product cost in the Absorption approach. However, FOH is treated as a period expense when using the Variable Costing approach! Absorption vs. Variable Costing Income Statements GIVEN: Selling Price $ 50 per unit Direct Material $ 18 per unit Direct Labor $ 7 per unit Variable Overhead $ 2 per unit Variable SG&A $ 5 per unit Fixed Overhead $ 160,000 Fixed SG&A $ 110,000 7:1.1a Accordingly, when using the Absorption Costing approach to reporting operations, the per unit product cost for Maxwell Company would include the DM ($18) the DL ($7), the VOH ($2) and the unitized value of the FOH ($8) based on units produced during the period ($160,000 20,000). The total per unit product cost using the Absorption Costing approach is therefore $35 for this given accounting period when 20,000 units are produced. Absorption vs. Variable Costing Income Statements GIVEN: Selling Price $ 50 per unit Direct Material $ 18 per unit Direct Labor $ 7 per unit Variable Overhead $ 2 per unit Variable SG&A $ 5 per unit Fixed Overhead $ 160,000 Fixed SG&A $ 110,000 $160,000 20,000 = $8 $18 + $ 7 + $ 2 = $ 27 $ 27 + $8 = $35 7:1.2a When using the Variable (sometimes referred to as the Direct) Costing approach, unit product costs consist of ONLY the DM, the DL and the VOH costs. Fixed Manufacturing OH, Fixed SG&A and Variable SG&A are period expenses! YES, this is true, Variable SG&A costs are ALWAYS period expenses, and NEVER product costs!...
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Homework 7 SP2007 - 7:1.1 Absorption vs. Variable Costing...

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