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Chapter 7: VARIABLE COSTING ABSORPTION vs VARIABLE COSTING ABSORPTION (traditional, or full) COSTING required by GAAP for external reporting costs classified by function (i.e. product cost or period cost) all costs of production included in inventory/COGS production costs include: Direct materials Direct labor Manufacturing overhead (includes variable and fixed costs) VARIABLE (or direct) COSTING more useful for internal reporting, management decision making, and CVP analysis costs classified by behavior (i.e. variable costs or fixed costs) differs from absorption costing in treatment of fixed manufacturing overhead only the variable production costs included in inventory/COGS treats all fixed costs as period costs INCOME STATEMENT USING INCOME STATEMENT ABSORPTION COSTING USING VARIABLE COSTING Sales revenue Sales revenue -- Cost of goods sold -- Variable cost of goods sold Gross profit -- Variable selling and adm expense -- Selling and adm expenses Contribution margin Net income -- Fixed overhead -- Fixed selling and adm expense Net income Example #1 Absorption vs Variable Costing The Boogie Company produces a single product. Information regarding the company’s costs and manufacturing operations are given below: Number of units produced annually 6,000 Variable costs per unit: Direct materials $ 2 Direct labor 4 Variable overhead 1 Variable selling and adm expenses 3 Fixed costs per year: Manufacturing overhead $30,000 Selling and adm expense 10,000
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Assume that Boogie Company began the year with no units in inventory; during the year the company sold 5,000 units at a selling price of $20 per unit. Required: a. Determine the cost of a unit produced using absorption costing. b. Determine Boogie Company’s net income using absorption costing. c. Determine the cost of a unit produced using variable costing.
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