Chapter 8 Notes

Chapter 8 Notes - AGENDA VARIABLE AND ABSORPTION COSTING...

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Unformatted text preview: AGENDA: VARIABLE AND ABSORPTION COSTING Variable costing and absorption costing are alternative methods of determining unit product costs. They affect: • Inventory valuations. • Net operating income. KEY ELEMENTS ABSORPTION COSTING • Absorption costing was used in earlier chapters and is generally considered to be required for external financial reports and is clearly required for tax reporting. • Under absorption costing, product costs include all manufacturing costs: • Direct materials. • Direct labor. • Variable manufacturing overhead. • Fixed manufacturing overhead. • Under absorption costing, the following costs are treated as period expenses and are excluded from product costs: • Variable selling and administrative costs. • Fixed selling and administrative costs. VARIABLE COSTING • Variable costing is an alternative for internal management reports. • Under variable costing, product costs include only the variable manufacturing costs: • Direct materials. • Direct labor (unless fixed). • Variable manufacturing overhead. • Under variable costing, the following costs are treated as period expenses and are excluded from product costs: • Fixed manufacturing overhead. • Variable selling and administrative costs. • Fixed selling and administrative costs. CLASSIFICATION OF COSTS UNDER VARIABLE AND ABSORPTION COSTING UNIT PRODUCT COST COMPARISON • Unit product costs differ between variable and absorption costing. EXAMPLE: Harvey Company produces a single product. Number of units produced annually.............................. 25,000 Selling price per unit..................................................... $30 Variable costs per unit: Direct materials, direct labor, and variable manufacturing overhead.......................................... $10 Variable selling and administrative expense.............. $3 Fixed costs per year: Fixed manufacturing overhead................................... $150,000 Fixed selling and administrative expense................... $100,000 Unit product costs are computed as follows: Absorptio n Costing Variable Costing Direct materials, direct labor, and variable manufacturing overhead........ $10 $10 Fixed manufacturing overhead ($150,000 ÷ 25,000 units)................... 6 Total unit product cost............................ $16 $10 • Selling and administrative expenses are always treated as period costs and are expensed in the current period; they are not treated as product costs under either costing method. INCOME STATEMENT COMPARISON Harvey Company had no beginning inventory, produced 25,000 units, and sold 20,000 units last year....
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Chapter 8 Notes - AGENDA VARIABLE AND ABSORPTION COSTING...

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