Variable Costing: A Tool for Management - Lecture Slides |, Study notes of Management Accounting

Download Variable Costing: A Tool for Management - Lecture Slides | and more Study notes Management Accounting in PDF only on Docsity!

© 2010 The McGraw-Hill Companies, Inc.

Variable Costing:

A Tool for Management

Chapter 7

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.

Quick Check 

Which method will produce the highest values for work in process and finished goods inventories? a. Absorption costing. b. Variable costing. c. They produce the same values for these inventories. d. It depends... Which method will produce the highest values for work in process and finished goods inventories? a. Absorption costing. b. Variable costing. c. They produce the same values for these inventories. d. It depends...

Which method will produce the highest values for work in process and finished goods inventories? a. Absorption costing. b. Variable costing. c. They produce the same values for these inventories. d. It depends... Which method will produce the highest values for work in process and finished goods inventories? a. Absorption costing. b. Variable costing. c. They produce the same values for these inventories. d. It depends...

Quick Check 

Unit product cost is determined as follows:

Under absorption costing, all production costs, variable

and fixed, are included when determining unit product

cost. Under variable costing, only the variable

production costs are included in product costs.

Unit Cost Computations

Learning Objective 2

Prepare income Prepare income

statements using both statements using both

variable and absorption variable and absorption

costing. costing.

Absorption Costing

Fixed manufacturing overhead deferred in

inventory is 5,000 units × $6 = $30,000.

Variable Costing

Sales (20,000 × $30) $600, Less variable expenses: Beginning inventory $ - Add COGM (25,000 × $10) 250, Goods available for sale 250, Less ending inventory (5,000 × $10) 50, Variable cost of goods sold 200, Variable selling & administrative expenses (20,000 × $3) 60,000 260, Contribution margin 340, Less fixed expenses: Manufacturing overhead $150, Selling & administrative expenses 100,000 250, Net operating income $ 90,

Variable Costing

Sales (20,000 × $30) $600, Less variable expenses: Beginning inventory $ - Add COGM (25,000 × $10) 250, Goods available for sale 250, Less ending inventory (5,000 × $10) 50, Variable cost of goods sold 200, Variable selling & administrative expenses (20,000 × $3) 60,000 260, Contribution margin 340, Less fixed expenses: Manufacturing overhead $150, Selling & administrative expenses 100,000 250, Net operating income $ 90, Variable manufacturing costs only. All fixed manufacturing overhead is expensed.

Variable Costing

Comparing the Two Methods

Variable costing net operating income $ 90,

Add: Fixed mfg. overhead costs

deferred in inventory

(5,000 units × $6 per unit) 30,

Absorption costing net operating income $ 120,

Variable costing net operating income $ 90,

Add: Fixed mfg. overhead costs

deferred in inventory

(5,000 units × $6 per unit) 30,

Absorption costing net operating income $ 120,

Fixed mfg. overhead $150,

Units produced 25,000 units

= = $6 per unit

We can reconcile the difference between absorption and variable income as follows:

Comparing the Two Methods

Unit Cost Computations

Since the variable costs per unit, total fixed costs, Since the variable costs per unit, total fixed costs, and the number of units produced remained and the number of units produced remained unchanged, the unit cost computations also unchanged, the unit cost computations also remain unchanged. remain unchanged.

Absorption Costing Sales (30,000 × $30) $900, Less cost of goods sold: Beg. inventory (5,000 × $16) $ 80, Add COGM (25,000 × $16) 400, Goods available for sale 480, Less ending inventory - 480, Gross margin 420, Less selling & admin. exp. Variable (30,000 × $3) $ 90, Fixed 100,000 190, Net operating income $230, Absorption Costing Sales (30,000 × $30) $900, Less cost of goods sold: Beg. inventory (5,000 × $16) $ 80, Add COGM (25,000 × $16) 400, Goods available for sale 480, Less ending inventory - 480, Gross margin 420, Less selling & admin. exp. Variable (30,000 × $3) $ 90, Fixed 100,000 190, Net operating income $230,

Absorption Costing

Fixed manufacturing overhead released from

inventory is 5,000 units × $6 = $30,000.

Unit product cost.

Variable costing net operating income $ 260,

Deduct: Fixed manufacturing overhead

costs released from inventory

(5,000 units × $6 per unit) 30,

Absorption costing net operating income $ 230,

We can reconcile the difference between absorption and variable income as follows:

Fixed mfg. overhead $150,

Units produced 25,000 units

= = $6 per unit

Comparing the Two Methods

Comparing the Two Methods