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Chapter 8 - Variable Costing - Chapter Eight MGT223...

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Unformatted text preview: Chapter Eight MGT223 Variable Costing: A Tool for Management Learning Objective 1 Explain how variable Explain how variable costing differs from costing differs from absorption costing and absorption costing and compute unit product compute unit product costs under each method. costs under each method. Overview of Absorption and Variable Costing Direct Materials Direct Labour Variable Manufacturing Overhead Fixed Manufacturing Overhead Variable Selling and Administrative Expenses Fixed Selling and Administrative Expenses Costing Costing Product Costs Period Costs Product Costs Period Costs Albert 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 $ Selling & administrative expenses 100,000 $ 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 $ Selling & administrative expenses 100,000 $ Unit Cost Computations Unit product cost is determined as follows: Under absorption costing , selling and administrative expenses are always treated as and deducted from revenue as incurred. Absorption Costing Variable Costing Direct materials, direct labor, and variable mfg. overhead 10 $ 10 $ Fixed mfg. overhead ? 6- Unit product cost 16 $ 10 $ Absorption Costing Variable Costing Direct materials, direct labor, and variable mfg. overhead 10 $ 10 $ Fixed mfg. overhead ? 6- Unit product cost 16 $ 10 $ Unit Cost Computations Learning Objective 2 Prepare income Prepare income statements using both statements using both variable and absorption variable and absorption costing. costing. Income Comparison of Absorption and Variable Costing Let’s assume the following additional information for Albert 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 400,000 Goods available for sale 400,000 Ending inventory 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 Sales (20,000 × $30) 600,000 $ Less cost of goods sold: Beginning inventory- $ Add COGM 400,000 Goods available for sale 400,000 Ending inventory 80,000 320,000 Gross margin 280,000 Less selling & admin. exp....
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