chapter 21 variable costing - lrbrasher.com

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Chapter 21Variable Costing

© 2018 Pearson Education, Inc.

Chapter 21 Learning Objectives

1. Distinguish between variable costing and absorption costing

2. Compute operating income using variable costing and absorption costing

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Chapter 21 Learning Objectives

3. Use variable costing to make management decisions for a manufacturing business

4. Use variable costing to make management decisions for a service business

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Learning Objective 1

Distinguish between variable costing and absorption costing

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HOW DOES VARIABLE COSTING DIFFER FROM ABSORPTION COSTING?

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• Managerial accounting provides managers with information that is useful for internal decision making.

• The cost of producing products is estimated using one of two methods:– Absorption costing includes all product costs.– Variable costing considers only variable

manufacturing costs. • Contribution margin is the difference between

net sales revenue and variable costs.


HOW DOES VARIABLE COSTING DIFFER FROM ABSORPTION COSTING?

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Comparison of Unit Product Costs

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Comparison of Unit Product Costs

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Compute operating income using variable costing and absorption costing

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HOW DOES OPERATING INCOME DIFFER BETWEEN VARIABLE COSTING

AND ABSORPTION COSTING?

• Variable costing and absorption costing will result in different operating income when:– Units produced are more than units sold– Units produced are less than units sold

• The operating income result is the same under both methods when units produced equal units sold.

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Absorption Costing Variable Costing

Sales Sales

Less: Cost of Goods SoldDirect MaterialsDirect LaborVariable Manufacturing OverheadFixed Manufacturing Overhead

Less: Variable CostsDirect MaterialsDirect Labor Variable Manufacturing OverheadVariable Selling & Admin. Expenses

Gross Profit Contribution Margin

Less: Selling and Admin. ExpensesVariable Selling & Admin. ExpensesFixed Selling & Admin. Expenses

Less: Fixed CostsFixed Manufacturing OverheadFixed Selling & Admin. Expenses

Operating Income Operating Income

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Income statements for absorption costing and variable costing:

HOW DOES OPERATING INCOME DIFFER BETWEEN VARIABLE COSTING

AND ABSORPTION COSTING?


Units Produced Equal Units Sold

• Assume the following: – There is no beginning Finished Goods

Inventory.– The number of units produced is 2,000, and

the number of units sold is also 2,000. – There is no ending Finished Goods Inventory

because all units are sold. • Operating income is the same under both

methods.

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© 2018 Pearson Education, Inc. 21-13


Units Produced Are More Than Units Sold

• Assume the following:– There is no beginning Finished Goods

Inventory.– The company produced 2,500 tablet

computers.– The company sold 2,000 tablet computers.– 500 units are included in ending Finished

Goods Inventory. • Operating income under absorption

costing is greater than under variable costing.

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Units Produced Are More Than Units Sold


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Units Produced Are Less Than Units Sold

• Assume the following:– There are 500 units in beginning Finished

Goods Inventory.– The company produced 1,500 tablet

computers.– The company sold 2,000 tablet computers.– There are zero units in ending Finished Goods

Inventory.• Operating income under absorption

costing is less than under variable costing.

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Units Produced Are Less Than Units Sold

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Use variable costing to make management decisions for a manufacturing business

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HOW CAN VARIABLE COSTING BE USED FOR DECISION MAKING IN A MANUFACTURING COMPANY?

• For decision making, some cases should use variable costing, while other cases should use absorption costing.

• Manager decisions include: – Setting sales prices– Controlling costs– Planning production

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Analyzing Profitability

• Managers analyze profitability for products and segments. – Managers must determine which products to

sell. – Managers assess the success or failure of the

businesses segments. – Managers analyze the contribution margin per

unit and make decisions about the sales mix of each unit’s products.

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Products

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Business Segments

• A business segment is an identifiable part of a company for which financial information is available. – Businesses can be segmented by geography,

customer types, products, or salespersons.• The contribution margin ratio is the ratio

of contribution margin to net sales revenue.

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Business Segments

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Profitability Analysis

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Analyzing Contribution Margin

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Use variable costing to make management decisions for a service business

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HOW CAN VARIABLE COSTINGBE USED FOR DECISION MAKING

IN A SERVICE COMPANY?

• Service companies provide services, rather than products, to their customers. – No inventory or cost of goods sold

• Service companies can use variable costing because they have both fixed and variable costs.

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Operating Income

JR’s Towing has the following accounts:

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Operating Income

By separating costs by behavior, fixed and variable, the company can calculate the contribution margin ratio by dividing the contribution margin by revenues:

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Profitability Analysis

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Contribution Margin

Analysis


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chapter 21 variable costing - lrbrasher.com

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