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MGMT_201_(Ganguly)_Lecture_11

# MGMT_201_(Ganguly)_Lecture_11 - 171 MGMT 201(Ganguly...

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McGraw-Hill/Irwin 17- 17- 1 1 MGMT 201 (Ganguly) Lecture 11: Lecture 11: More on More on Variable Costing Variable Costing Absorption Costing Absorption Costing Throughput Costing Throughput Costing

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McGraw-Hill/Irwin 17- 17- 2 2 Let’s put some numbers to an example and see what we can learn about the difference between absorption and variable costing. Absorption and Variable Costing
McGraw-Hill/Irwin 17- 17- 3 3 Mellon Co. produces a single product with Mellon Co. produces a single product with the following information available: 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: Mfg. overhead 150,000 \$ Selling & administrative expenses 100,000 \$ Absorption and Variable Costing

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McGraw-Hill/Irwin 17- 17- 4 4 Unit product cost is determined as follows: Unit product cost is determined as follows: 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 \$ Absorption and Variable Costing Selling and administrative expenses are always treated as period expenses and deducted from revenue. Assuming that units drive the costs
McGraw-Hill/Irwin 17- 17- 5 5 Absorption Costing Income Statements Absorption Costing Sales (20,000 × \$30 ) 600,000 \$ Less cost of goods sold: Beginning inventory Add COGM Goods available for sale Ending inventory Gross margin Less selling & admin. exp. Variable Fixed Net income Mellon Co. had no beginning inventory, produced 25,000 Mellon Co. had no beginning inventory, produced 25,000 units and sold 20,000 units this year at \$30 each. units and sold 20,000 units this year at \$30 each.

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McGraw-Hill/Irwin 17- 17- 6 6 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 Fixed Net income Absorption Costing Income Statements Mellon Co. had no beginning inventory, produced 25,000 Mellon Co. had no beginning inventory, produced 25,000 units and sold 20,000 units this year at \$30 each. units and sold 20,000 units this year at \$30 each.
McGraw-Hill/Irwin 17- 17- 7 7 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 income 120,000 \$ Mellon Co. had no beginning inventory, produced 25,000 Mellon Co. had no beginning inventory, produced 25,000 units and sold 20,000 units this year at \$30 each. units and sold 20,000 units this year at \$30 each.

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