Chapter 6

# Chapter 6 - Chapter 6 Variable Costing: A Tool for...

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Chapter 6 Variable Costing: A Tool for Management Suggested Homework: E6-1 thru E6-7, P6-10 thruP6-14

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Overview of Absorption and Variable Costing Direct Materials Direct Labor Variable Manufacturing Overhead Fixed Manufacturing Overhead Variable Selling and Administrative Expenses Fixed Selling and Administrative Expenses Variable Costing Absorption Costing Product Costs Period Costs Product Costs Period Costs
Quick Check    Which method will produce the highest values for  work in process and finished goods inventories?  a.  Absorption costing. b.  Variable costing. c.  They produce the same values for  these   inventories. d.  It depends. . .

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Harvey Company produces a single product with the following information available: Number of units produced annually 25,000 Variable costs per unit: Direct materials, direct labor, and variable mfg. overhead 10 \$ Selling & administrative expenses 3 \$ Fixed costs per year: Manufacturing overhead 150,000 \$ 100,000 \$ Unit Cost Computations
Unit  product cost   is determined as follows: Under absorption costing, selling and  administrative expenses are always treated as   period expenses   and  deducted from revenue as incurred. Absorption Costing Variable Costing Direct materials, direct labor, and variable mfg. overhead 10 \$ 10 \$ Fixed mfg. overhead (\$150,000 ÷ 25,000 units) 6 - Unit product cost 16 \$ 10 \$ Unit Cost Computations

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Income Comparison of Absorption and Variable Costing Let’s assume the following additional  information for Harvey Company. 20,000 units were sold during the year at a price  of \$30 each. There were no units in beginning inventory. Now, let’s compute net operating income using both absorption and variable costing.
Absorption Costing Sales (20,000 × \$30) 600,000 \$ Less cost of goods sold: Beginning inventory - \$ Add COGM (25,000 × \$16 ) 400,000 Goods available for sale 400,000 Ending inventory (5,000 × \$16 ) 80,000 320,000 Gross margin 280,000 Less selling & admin. exp. Variable (20,000 × \$3) 60,000 \$ Fixed 100,000 160,000 Net operating income 120,000 \$ Absorption Costing

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Variable Costing Sales (20,000 × \$30) 600,000 \$ Less variable expenses: Beginning inventory - \$ Add COGM (25,000 × \$10 ) 250,000 Goods available for sale 250,000 Less ending inventory (5,000 × \$10 ) 50,000 Variable cost of goods sold 200,000 Variable selling & administrative expenses (20,000 × \$3) 60,000 260,000 Contribution margin 340,000 Less fixed expenses: Manufacturing overhead 150,000 \$ Selling & administrative expenses 100,000 250,000 Net operating income 90,000 \$ Variable manufacturing  costs only. All fixed manufacturing overhead is expensed. Variable Costing
Cost of Goods Sold Ending Inventory Period Expense Total Absorption costing Variable mfg. costs 200,000 \$ 50,000 \$ - \$ 250,000 \$ Fixed mfg. costs 120,000 30,000 - 150,000 320,000 \$ 80,000 \$ - \$ 400,000 \$ Variable costing Variable mfg. costs 200,000 \$ - 250,000 \$ Fixed mfg. costs - - 150,000 150,000 200,000 \$ 50,000 \$ 150,000 \$ 400,000 \$ Comparing the Two Methods

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Variable costing net operating income 90,000 \$ Add: Fixed mfg. overhead costs deferred in inventory (5,000 units × \$6 per unit) 30,000 Absorption costing net operating income 120,000 \$ Fixed mfg. Overhead          \$150,000         Units produced           25,000  =
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## This note was uploaded on 03/05/2010 for the course ACCT 285 taught by Professor Carver during the Fall '08 term at Iowa State.

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Chapter 6 - Chapter 6 Variable Costing: A Tool for...

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