Week 4, LO 5 Demo - Week 4 Week 4 Skill Building...

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Week 4 Week 4 Skill Building Demonstration Problem 5 Use variable costing to prepare a contribution format income statement and contrast absorption costing and variable costing. Learning Objective 5 Absorption costing is an approach in which all manufacturing costs, both fixed and variable cost are assigned to the products. Absorption costing is required for external reports. Variable costing on the other hand is used by managers for internal decision making and for internal reporting purposes Under variable costing , only the variable costs of making a product are assigned to the product. All other costs are treated as period costs and reported directly on the income statement as expenses. The fundamental difference between the two methods is how fixed manufacturing overhead costs are accounted for. Definitions January February Beginning 00 Illustrated Example of Absorption Costing To illustrate the difference between variable costing and absorption costing, we will first construct an absorption costing income statement and then determine the impact on net operating income under variable costing. EXAMPLE Tiny Tot Company produces monkey beanie hats for babies and toddlers. Data pertaining to the company’s operations are presented below: Per Beanie Per month Selling Price $100 Direct Materials $15 Direct Labor $4 Variable Mfg OH $3 Fixed Mfg OH $60 Variable Selling & Admin $10 Fixed Selling & Admin $20 Example
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Week 4, LO 5 Demo - Week 4 Week 4 Skill Building...

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