University:
California State University, Northridge
Course:
ACCT 230 | Introduction to Managerial Accounting
Academic year:

2024
Views:

39

Pages:

10
Author:

ilikemyicons0y5

Appendix 5A Variable Costing Appendix 5A Study Objective 10 Explain the difference between absorption costing and variable costing. Absorption versus Variable Costing  All manufacturing costs are charged to and absorbed by the product under full or absorption costing. This is how costs were handled in previous chapters.  Under variable costing only direct materials, direct labor, and variable manufacturing overhead costs are considered product costs. Fixed manufacturing overhead costs are recognized as period costs when incurred.  The difference between absorption costing and variable costing is graphically shown below. Absorption Costing Product Cost Fixed Manufacturing Overhead Variable Costing Period Cost Illustration 5A-1 Absorption versus Variable Costing: An Illustration  As an illustration, Premium Products Corporation manufactures a polyurethane sealant called Fix-it for car windshields. Relevant data for Fix-it in January 1996, the first month of production, is as follows: – Selling Price: $20 per unit. – Units: Produced 30,000; sold 20,000; beginning inventory zero. – Variable unit costs: Manufacturing $9 (direct materials $5, direct labor $3, and variable overhead $1) and selling and administrative expenses $2. – Fixed costs: Manufacturing overhead $120,000, and selling and administrative expenses $15,000. Absorption versus Variable Costing: Unit Production Cost  The per unit production cost under each costing approach is: Absorption Type of Cost Costing $ 5 Direct materials 3 Direct labor 1 Variable manufacturing overhead 4 Fixed manufacturing overhead ($120,000 ÷ 30,000 units produced) Total unit cost $ 13 Variable Costing $ 5 3 1 0 $ 9 Illustration 5A-2  The difference in total unit cost of $4 ($13 - $9) occurs because fixed manufacturing costs are a product cost under absorption costing and a period cost under variable costing. Absorption versus Variable Costing: Effects on Income  The income statements under the two costing approaches are shown on the next two slides.  Income from operations under absorption costing is $40,000 higher than under variable costing ($85,000 – $45,000). There is a $40,000 difference in the ending inventories ($130,000 under absorption costing and $90,000 under variable costing).  Under absorption costing, $40,000 of the fixed overhead costs have been deferred to a future period as a product cost. Absorption Costing Income Statement PREMIUM PRODUCTS COMPANY Income Statement For the Month Ended January 31, 1999 (Absorption Costing) Sales (20,000 units X $20) Cost of goods sold Inventory, January 1 Cost of goods manufactured (30,000 units X $13) Cost of goods available for sale Inventory, January 31 (10,000 units X $13) Cost of goods sold (20,000 units X $13) Gross profit Selling and administrative expenses (Variable 20,000 units X $2 + fixed $15,000) Income from operations $ 400,000 $ –0– 390,000 390,000 130,000 260,000 140,000 55,000 $ 85,000 Illustration 5A-3 Variable Costing Income Statement PREMIUM PRODUCTS COMPANY Income Statement For the Month Ended January 31, 1999 (Variable Costing) Sales (20,000 units X $20) Variable expenses Variable cost of goods sold Inventory, January 1 Variable manufacturing costs (30,000 units X $9) Cost of goods available for sale Inventory, January 31 (10,000 units X $9) Variable cost of goods sold Variable selling and administrative expenses (20,000 units X $2) Total variable expenses Contribution margin Fixed expenses Manufacturing overhead Selling and administrative expenses Total fixed expenses Income from operations $ 400,000 –0– 270,000 270,000 90,000 180,000 40,000 120,000 15,000 220,000 180,000 135,000 $ 45,000 Illustration 5A-4 Summary of Income Effects Circumstances Income Under Absorption Costing Variable Costing = Units Produced = Units Sold > Units Produced > Units Sold < Units Produced < Units Sold Illustration 5A-5 Rationale for Variable Costing  The rationale for variable costing focuses on the purpose of fixed manufacturing costs, which is to have productive facilities available for use.  Defenders of absorption costing justify the assignment of fixed manufacturing overhead costs to inventory on the basis that these costs are as much a cost of getting a product ready for sale as direct materials or direct labor.  The use of variable costing in product costing is acceptable only for internal use by management.